Bernetich, Hatzell, & Pascu, LLC.

Charitable Remainder Trust 

A Charitable Remainder Trust (CRT) is a trust created by you during your lifetime or in your will.  During the term of the trust, annual distributions are made to you or to one or more other beneficiaries selected by you.  At the end of the term of the trust, the trust would terminate and the remaining balance would be distributed to charitable organizations specified by you.  The amount of the annual annuity will be based on various factors in existence at the time that the trust is created including the Applicable Federal Rate (the rate, as provided by the IRS, used to determine the charitable deduction).

The CRT is exempt from income tax.  However, the income earned by the CRT is not exempt from taxation.  Instead, the income is accumulated in the trust and included as part of the annual distributions.  The income is then taxed to the beneficiaries as it is received.  If a highly appreciated asset is contributed to the trust and then sold, the tax on the resulting capital gain can be deferred and paid over the term of the trust.  Any income retained in the trust and the end of the trust term and distributed to the charitable beneficiaries will not be taxed.

If the CRT is created in your will, your estate would receive a charitable deduction based on the present value of the amounts passing to the charitable organizations which would reduce the size of your taxable estate and therefore reduce the amount of estate taxes due.

There are generally two types of CRTs (with some variations), a Charitable Remainder Annuity Trust (CRAT) and a Charitable Remainder Unitrust (CRUT).

With a CRAT, the amount distributed each year is a fixed percentage of the value of the assets passing to the trust upon creation of the trust.  All of the appreciation in excess to the Applicable Federal Rate is preserved for the remainder charitable beneficiaries.

With a CRUT, the amount distributed each year is a fixed percentage of the net fair market value of the trust assets determined annually.  A portion of the appreciation is distributed to the lifetime beneficiaries of the trust and a portion is retained and a portion is preserved for the remainder charitable beneficiaries.