beneficiary(ies), prepare the annual tax return (the trust will have its
own tax ID#), and provide form K1 to the income beneficiaries.
CRTs must pay a minimum of five percent (or net income) to the
income beneficiaries annually. In the case of a CR Annuity Trust
(CRAT), this amount remains the same for the life of the trust
(either the life of the income beneficiary or a set term of years). In
the other structure, the CR UniTrust (CRUT), the percentage is
fixed but re-calculated annually based on the market value of the
investments in the trust. If the value of the assets go up, the payment
goes up; if they go the other direction, the payment is reduced.
Already, we can see some reasons for the two types of CRTs, a client/
donor who values certainty (often an older donor) and who funds
a CRT with assets that will probably not vary greatly in value is a
better fit for the CRAT, as they will receive a fixed payment for the
term of the CRAT. A client/donor with assets not easily valued at
time of transfer and who is more willing to “bet” on good future
returns might be a better fit for the CRUT, as their income might
increase over the life of the CRUT. As we go through the process
of explaining these vehicles to your clients, we ask for a lot of
information. This conversation reveals many things, including which
planned gift might work best for them and their particular situation.
Above we see a CRAT illustration for a 75-year-old couple who
have a second house (on the lake or in a warm climate) in another
state. The couple is charitably inclined and would like to divest
themselves of the asset, maintain a lifetime income, and eventually
benefit their favorite charity.
As with any illustration, some assumptions were made as to
investment return, etc., but these numbers will suffice for our
purposes. The numbers chosen would represent a property bought
years ago and held onto for the couple’s use and, having reached
a point where they no longer travel to that destination, they have
been renting it out as an Airbnb.
The asset is transferred to the new owner, the CRAT. This triggers
the tax benefits as listed in the illustration, which will substantially
reduce the couple’s tax burden. The new owner (trustee) can sell
the asset, re-invest the entire proceeds, and then distribute the
income to the couple during their lifetimes in a fixed payment that
the couple can rely on for their cash flow. This will spread out the
capital gains tax and, if the investments work out as assumed, the
couple will leave a substantial legacy for their favorite charitable
purpose.
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