Return of the Charitable Remainder Trust

Lately I’ve noticed a flurry of renewed interest in Charitable Remainder Trusts from my nonprofit clients, their donors, wealth advisors, attorneys and others. I’ve been asked to speak about them and I’ve been asked to consult on several gift situations involving CRTs. I’ve even created a new CRT module which will soon be added to my online school. Prior to this year there had been a lull, but now it seems everyone wants to know about them, use them, and dive deeper into their capabilities.

I asked some colleagues who work in other parts of the U.S. about what they’re seeing and they are all experiencing the same thing. People everywhere are taking a fresh look at these powerful and creative tools. I see two reasons behind this resurgence and I thought you might like to know what they are.

I also thought I would also outline the reasons WHY someone would want to create a CRT. That way, you’ll know what kinds of situations to look out for and know when this solution might be the right one for a particular donor. Don’t worry so much about trying to keep all the different types of CRTs and their acronyms straight. Focus on the WHY for the donor and the rest will work itself out.

Some CRT Background

Before we dive into the meat of this article, it’s probably a good idea if we go over how a Charitable Remainder Trust works. They are sophisticated planning tools, but at their core they all accomplish the same basic functions.

A donor makes a contribution to her Charitable Remainder Trust and receives the corresponding income tax deduction.
The CRT makes payments to the donor and/or other beneficiaries she names.
When the CRT comes to its scheduled end, the remaining balance is distributed to charities chosen by the donor.

That’s it. That’s how they work. Of course, we could talk for hours about the various assets the donor can contribute, how long the distributions would last and whether the amount would stay level or vary over time, but these are just details. These three basic elements are common to ALL Charitable Remainder Trusts.

What’s Driving this Resurgence?

First, Charitable Remainder Trusts have been getting more press lately because of the new laws around Qualified Charitable Distributions. The SECURE Act 2.0 from 2022 made it possible to contribute money directly from an IRA to a Charitable Remainder Trust. Never before was this allowed. There are some pretty strict rules around this new giving technique which makes it unattractive in most cases, but it still got a lot of press. For more on those rules, see my earlier article, New QCD Rules: The Fine Print.

Second, the rules on distributions from inherited retirement accounts changed with the SECURE Act of 2019. Charitable Remainder Trusts offer a creative work-around to the new more restrictive regulations. Prior to 2020, if someone inherited an IRA or other qualified retirement account, they could withdraw the money over their remaining lifetime. It was commonly referred to as a “stretch-IRA”, because the beneficiary could stretch out payments over their lifetime. The new regulations require that most beneficiaries who inherit these types of accounts from a non-spouse withdraw the ENTIRE balance within 10 years of the death of the original account owner. That means more taxable income over that shorter 10 year period for the beneficiary. There is only one way I know of to get around this and that is the Charitable Remainder Trust.

If the original account owner names her Charitable Remainder Trust as the beneficiary of her IRA or other retirement account, the CRT makes distributions to her heirs over the timeframe designed by the donor. There are a few payment schedules to choose from:

A term of up to 20 years,
Lifetime(s) of the beneficiaries, OR
Lifetime(s) of the beneficiaries plus a term of up to 20 years.

This solution allows her to spread out distributions for a longer period of time, spread out the taxation of those payments, control the timing of the distributions, protect the corpus of the trust from heirs’ creditors, ex-spouses, etc., AND create a significant charitable legacy. Furthermore, until the donor dies, this solution remains revocable. She can cancel it or revise it whenever she wants. I think you can see why this solution is attractive to so many people.

Reasons People Create Charitable Remainder Trusts

I’ve been working with CRTs for over 20 years and in that time I’ve come to recognize the main reasons that people will create one. Keep these practical matters in mind when talking to donors or clients and you’ll know when to bring up this tool as a possible solution to their expressed goals.

Need for Income: This might seem like a no-brainer, but you’d be surprised how many times I hear someone suggest a CRT for someone who doesn’t need additional income and neither does anyone in their family.

Desire to Give: If the person has zero desire to make a charitable gift, a CRT is not the right solution for them. It may offer some attractive tax benefits, but at the end of the day they are still giving up some of their wealth for charity.

Valuable Asset They No Longer Need/Use: Our assets can outlive their intended purpose. At that point, they can be sold, but a sale often comes with taxable gains. Even if we need the value of the asset, we may avoid selling it because of the associated taxes. A CRT can often sell these assets free of tax – leaving 100% of the sales proceeds to be used for distributions to the donor and/or others they care about.

Remove Asset From Estate: I’ve seen this more times than I can count. Someone has a valuable asset that they want to get some value from, but they don’t want their family to have to deal with it when they pass away. They may also be concerned with estate taxes. Rather than selling the asset and recognizing the associated taxes, a donation to a CRT can be a good solution. It removes the asset from the estate at the time of the gift, provides an income stream to the donor or others they care about and creates a charitable legacy. Win-win-win.

Asset Protection: We touched on this earlier, but it’s worth revisiting. Assets placed into a Charitable Remainder Trust are protected from the income beneficiaries, their creditors, ex-spouses, etc. If someone wants to create a stream of income for a loved one, but doesn’t want anyone to be able to access the corpus of the trust, a CRT can be a nice way to do that. The income beneficiaries are only entitled to the payments. They cannot touch the rest of the assets for any reason. It is protected for the charitable remainder beneficiaries.

In Summary

I hope this article has given you something to think about. I hope you’re energized to dive into the wonderful world of Charitable Remainder Trusts even more. Keep learning; keep talking about these kinds of gifts, and don’t let perceived complexity intimidate you. Focus on the WHY of the gift and the HOW will work itself out.