CRTs Offer Predictability, Flexibility

At one time or another each of us has probably wished for a crystal ball to see into the future. Having one would make personal and financial decisions much easier, wouldn’t it? In the absence of such a wonder, we are left to discern strategies using information at hand and the advice and counsel of financial advisors.

Fortunately, because of its predictability and flexibility, the charitable remainder trust (CRT) may offer the next best thing to a crystal ball.

In the right circumstances, this instrument can increase income, reduce taxes, unlock appreciated investments, eliminate investment worries and, ultimately, provide very important support.
A growing number of our donors have been interested in making planned gifts through a CRT so that they may provide a larger contribution to Glenmary Home Missioners than would be possible through an outright gift.

What Is a Trust?
A trust is a legal entity established by an individual to set aside specific assets to be used for specified purposes over time. The trust is managed by a third party, such as an individual, a bank or, in some cases, an organization such as Glenmary. There are a variety of trust arrangements.

Charitable remainder trusts are designed to enable a person to continue receiving the earnings from his or her assets for life, without management worries, and then, after death, to be able to make a significant gift to a charitable organization such as Glenmary. There are two types of tax-favored CRTs: the unitrust and the annuity trust.

When the donor creates a CRT, he/she irrevocably transfers money, securities or other assets to a trustee—it could be a bank, trust, community foundation or fund manager. The trust pays the donor an income for life or for a period of years.

If desired, the trust can also pay an income to another beneficiary of the donor’s choice (i.e., spouse or other designated beneficiary). At the death of the surviving beneficiary, the remaining principal in the trust goes to Glenmary.

The trust can be designed to fit the unique needs of the donor. First, the donor decides how much to place into the trust and determines the income he or she would like to receive from the donated assets. The selected rate of income return must be at least 5 percent. Usually the rate selected is 5-7 percent. The best rate will depend upon the number of beneficiaries selected and their ages. Then the donor decides which type of CRT will work best.

Choosing a CRT is a little like shopping for a new car—the right one depends on the donor’s personal needs. Luckily, CRTs come in five variations. You and your professional advisors should decide the type of trust that will work best for you.

Annuity trust. This type of trust pays a fixed dollar amount each year, which works well if the donor seeks a reliable income.

Standard unitrust. A unitrust pays the donor a variable amount equal to a stated percentage of the net fair market value of the trust assets as recalculated yearly, providing a possible hedge against inflation.

Net income with make-up unitrust. This type of trust pays the donor only the trust’s actual income if it is less than the stated percentage of the market value of the trust’s assets (as recalculated yearly). Any income deficiency, however, is made up in later years if the trust income exceeds that percentage, an effective method to build retirement income.

Net income with no make-up unitrust. The donor receives the trust’s actual income or a fixed percentage of market value (as recalculated yearly), whichever is less. Income deficiencies are not made up. This plan may work well in a high interest rate environment.
Flip unitrust. Set up as either of the last two types, this trust converts to a standard unitrust on a triggering event, such as the sale of an “unmarketable” asset used to fund the trust. Consider this trust if you are making a gift of real estate.

Annuity Trust or Unitrust?
The choice of an annuity trust or a unitrust depends primarily on the donor’s economic circumstances and timeframe.

With an annuity trust, the donor receives the same fixed amount each year. This is advantageous when the donor wants to be certain of the dollars received year to year. If the donor is concerned about the possibility of recessionary times and falling market values, the annuity trust has greater appeal. Although the donor can’t add to this annuity trust later in order to increase income, he/she can always create a new trust for that purpose.

In comparison, a unitrust may be a hedge against inflation. If the donor foresees economic growth resulting in appreciation of the trust’s assets, a unitrust is the best option. The valuation can rise or fall, but over time a well-managed unitrust may offer better protection of purchasing power than fixed dollar payments.

A further advantage is that if the donor wants to enlarge the trust later, he/she can make additional contributions without the cost of creating and administering more than one trust.

Significant Tax Benefits
Now consider the major and wide-ranging tax savings realized by the creation of a CRT.

First, when the trust is funded, the donor immediately obtains the benefit of a sizable income-tax charitable deduction. This is equal to the present value of the remainder interest ultimately payable to Glenmary, based on Internal Revenue Service tables of life expectancy factors. The older the beneficiary (and the lower the income payout), the greater the charitable deduction.

The donor can fund the charitable remainder trust with cash, securities or other property. Highly appreciated assets that generate low current income are an ideal funding medium.

While an individual may be reluctant to sell such assets directly because of the tax he/she would pay on the gain, the donor can transfer them to the trust without incurring the capital gains tax. The trust can sell the assets without incurring any tax and then reinvest the proceeds in order to secure a higher current income yield.

Perhaps over the years a person’s personal investments have grown handsomely, but he/she now realizes that the yield is inadequate.

Unfortunately, if the individual sells and reinvests in higher yielding securities, he/she would lose part of the gain to taxes. The answer? Transfer the appreciated securities to a CRT. In return for the gift, the donor might receive income two to four times greater than the current dividend from the typical growth stock.

For example, Pauline, 75, owns several stocks with a market value of $100,000, but they pay dividends of only $2,000 a year, or 2 percent of market value. She decides to transfer these securities to a charitable remainder annuity trust that will pay her $7,000 a year, increasing her gross income by $5,000.
If Pauline sold her stocks instead, she would pay a large tax on her capital gain. Their cost basis is $30,000, compared to the current market value of $100,000, resulting in a gain of $70,000.

At a federal capital gains tax rate of 15 percent, the tax would be $10,500. This would leave her with only $89,500 to reinvest, so she would have to find stocks that pay dividends of at least 8 percent to receive the same $7,000 her trust could pay her.

Moreover, Pauline will receive an income tax deduction equal to about one-half of her $100,000 contribution to the trust.

In addition to tax savings, there are other reasons to consider a gift in trust which will ultimately benefit Glenmary Home Missioners.

First, the donor is relieved of asset management worries. The donor is freed of the day-to-day concerns of investing for needed income. And the donor frees his or her surviving spouse of similar concerns in the future when ill health or other factors may complicate estate management.

Second, there may be significant estate tax advantages. Charitable gifts made through charitable remainder trusts are effectively excluded from and, therefore, not taxed in a donor’s estate at death.

Other Kinds of Trusts
The charitable lead trust is basically the opposite of a CRT. Instead of transferring the “remainder” interest to Glenmary and providing an annual payment to the donor, or his or her designated beneficiary, the lead trust provides for payments to Glenmary for a stated term of years.

Unlike a CRT, a donor commonly gets no income tax deduction upon transfer of assets to a charitable lead trust.

However, if the donor retains no interest in the lead trust, the value of the trust is excluded from the donor’s estate and any net appreciation in the trust assets, therefore, passes to the donor’s descendants or other non-charitable beneficiaries free of gift or estate taxes.

Accordingly, assuming a donor has sufficient income to provide for current needs and also faces a gift or estate tax liability upon transfer of assets to family members, a lead trust provides a good opportunity to fulfill charitable desires and potentially to transfer substantial assets to family with minimum gift and estate tax consequences.

A revocable trust is one in which a donor reserves the right to terminate it at any time in the future. Typically, a donor would establish a revocable trust designating a bank, a trusted individual or an organization such as Glenmary as trustee.

The trust could reserve a lifetime income to the donor and provide that after the donor’s death, the trust assets would pass to Glenmary and effectively be excluded from the donor’s taxable estate. Because the trust is revocable and can be discontinued at any time, there is no federal income tax charitable deduction available to the donor.

Creating a Trust by Will
So far, all discussion has centered on trusts established during a donor’s lifetime. Such trusts are called inter vivos trusts—or living trusts. Most trusts may also be established in one’s will, in which case they are called testamentary trusts.

In a testamentary trust, for example, a person could establish a trust to take effect upon his or her death, which would provide payments to a spouse or other surviving relative for life, after which Glenmary would receive the trust assets to further its work.

The donor, while living, would have full use of and access to the property. Further, the donor would have the satisfaction of knowing that after death, his or her spouse would receive payments for life with no management worries, and that on the spouse’s death, Glenmary would receive a substantial gift for its mission.

In Conclusion
A person considering establishing a living or a testamentary trust to benefit their family or a charity—or establishing a permanent memorial in a family name or in honor of another person by way of a trust or other deferred gift—should consult an attorney or other professional advisor experienced in estate planning and tax law. Such professional advice is necessary in order to determine the suitability of certain trust arrangements to your personal circumstances.

The staff of Glenmary’s Planned Giving Office would be happy to meet or talk with anyone interested in establishing a trust that will benefit Glenmary and our work in the years ahead.

If you have any questions, please contact planned giving officer Susan Lambert, 800.935.0975.

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