Most charitable organizations receive and administer medium-sized gifts and are quite
comfortable doing so. Since most donations don't exceed $25,000, donor tax and estate
planning are not usually concerns.When the size of the gift moves into the six-figure
range, however, the degree to which the gift meets the donor's tax and financial planning
objectives becomes increasingly important. Through the use of charitable remainder trusts
(CRTs), your organization can tailor these large gifts to the special needs of the
individual donor.
Remember that prospects of these large donations are rare. However, when they arise, it
is important for you to understand how to meet the needs of the donor while accomplishing
the objectives of your organization. In many cases, a CRT can help balance these two
objectives.
In simple terms, a charitable remainder trust operates as follows:
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The donor makes an irrevocable transfer of property to the
trust.
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The donor retains the right to receive income from the
property or creates an income interest for another person.
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The donor receives a partial income tax charitable deduction
in the year of the gift.
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The donor incurs no immediate capital gains tax on the
transfer to and subsequent sale by the trust of appreciated, long-term assets.
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At the end of the trust's term, the trust principal
distributes to charity.
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Flexibility is key
The beauty of the CRT is its flexibility compared to other gift arrangements. For
example, the donor can choose the trustee or, in some cases, be his or her own trustee.
The donor can choose the type of payment to receive (either fixed or fluctuating) and the
frequency of the payment (monthly, quarterly, semi-annually, or annually). Finally, the
trust term can be measured by the life or lives of individuals living when the trust is
created.
The investment strategy of the trust and taxable character of the income can be
tailored to meet the unique needs of the donor. Also, the donor can choose one or more
charitable organizations to share in the trust principal upon termination of the trust.
CRTs can be established by the donor without the help of the benefiting organization;
however, the trust document is complicated and the donor's tax advisor may not specialize
in charitable remainder trusts. Therefore, it is a good idea to have boilerplate documents
of these trusts on hand that can be forwarded to the donor's counsel for tailoring.
Seek guidance for CRTs
Charitable remainder trusts, although complex planned giving mechanisms, can be a
tremendous way for you to capture large gifts. Their flexibility and the fact that the
donor can make the gift but still receive a lifetime income, makes them very attractive
options.
Calculating the charitable deduction and the taxation payments are beyond the scope of
this article, but are nevertheless important subjects that you should address. Nonprofit
organizations should not be afraid to invest some time and expense in becoming
knowledgeable about CRTs.
Tax law and regulations associated with CRTs are complicated. If the document does not
meet the criteria set by the Internal Revenue Service, the donor's tax deduction may be
revoked. So it is important that you seek professional guidance. If you have a donor who
is interested in this type of trust, please call me.
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