Trust benefits both sides

Charitable remainder trusts are most advantageous to individual donors who intend to make a significant gift by donating over $300,000.   Individuals considering this option must be certain of the charity they would like to support.  More importantly, they must be certain they will not require the principal portion of the donation back.  This form of planned giving has some great benefits however offers little flexibility after the trust has been established.

Discussing your intentions with your investment advisor, trust company and estate lawyer is the best start to this process.  The trustee and lawyer should then be able to provide an estimate of the costs associated with establishing a CRT.

Assuming that the numbers make sense, a CRT is established by transferring property from an individual to the trust.  This transfer is considered a disposition of property and may result in the individual realizing a capital gain or loss.

In the trust documents, the individual names a charity the beneficiary and the charity obtains immediate legal title to the property.  Once the beneficiary is named you are not able to change the charity or revoke the trust.

The trust is created so that all of the income earned within the trust is paid out to the individual that established the trust.  This continues until the death of the individual.  If the individual has a surviving spouse then the trust may be structured to pass the income onto this spouse.  This continues until the death of the second spouse.  All income received by the individual and/or spouse is considered taxable income and taxed in their hands.  As soon as the trust is funded, a tax receipt is issued by the charity.  The receipt is discounted, based on a present value calculation which takes into account the individual’s age.  The receipt can be used to offset income in the year the trust was created, and the credit may be carried forward for an additional five years.  Upon death the property is generally transferred from the trust to the charity.

The above provides a general overview of how a CRT is normally structured.  Within the above text are several unattractive components, including legal fees, income inclusion from the transfer of assets into the trust, ongoing income to report and the inability to change or revoke beneficiaries.  Why are charitable remainder trusts still worth considering for some?

Main Benefits

  • Income:  Individuals donating are able to obtain income from the trust during their lifetime.
  • Tax credit:  Significant tax benefits may be provided to the individual based upon the trust’s residual interest.  As mentioned above, this calculation is based on the fair market value of the trust assets and an estimate of the individual’s life expectancy.  The older the individual, the lesser the discount, making the charitable remainder trust more appealing to seniors.
  • Estate Plan:  Once set up the individual knows that a component of their estate plan is complete; it cannot be contested by dependents.
  • Election:  Individuals are able to elect an amount between the adjusted cost base and fair market value of the assets transferred to the trust.
  • Probate:  Trust assets are not subject to probate therefore may reduce other administration costs and delays.
  • Control:  The individual may retain control of the management and use of the trust assets, even though the principal portion may not be withdrawn.  If the assets are real property, the individual may live on the property.  If the assets are financial securities, the individual may decide how the funds should be invested.

An Illustration

Last year Mr. Baker passed away leaving most of his estate to Mrs. Baker.  Mrs. Baker met with us to discuss how her financial affairs should now be structured given this significant change in her circumstances.  During this discussion we noted that she had a complex family situation and wanted to leave the majority of her estate to charity.

In conjunction with a will and estate planner we noted a few concerns with leaving her estate to charity through her will.  The first point we discussed was that gifts left through a will may be challenged and lacked the privacy she desired.  In addition, we noted that the large gift would result in tax credits she may not be able to utilize on her final tax returns.  Another point that we noted is that now she has nearly twice the income to report on an annual basis with only one set of basic exemptions.

Since Mrs. Baker ultimately wants the charity to be the beneficiary of her estate we suggested that she establish a Charitable Remainder Trust (CRT).   By transferring her investments into a CRT, Mrs. Baker would receive an immediate donation receipt that she may claim in the current year or carry forward.   In addition, Mrs. Baker would receive the income from the CRT for her lifetime.  On her death, the charity would receive the capital funds held in the CRT.  It was important to have her will revised in conjunction with establishing the CRT.

The good news is that the CRT enabled Mrs. Baker to utilize the tax credits during her lifetime, without changing her lifestyle or the timing of the gift.  With this strategy it is important to also have capital outside of the CRT in the event of emergencies.

Although CRTs may be more costly to set up than other options it comes with their benefits.  Depending on an individual’s personal circumstances, a charitable remainder trust may be worth considering.

Before implementing any strategy noted in our columns we recommend that individuals consult with their professional advisors (insurance consultant, financial advisor, accountant and estate lawyer).