By Eric Kinaitis

A planned gift is one that integrates personal, financial, and estate planning goals with a donor’s giving, regardless if the giving is done while they are alive or at the time of their death.

Many planned giving vehicles are available, including bequests, donor advised funds, private foundations and charitable trusts. Often the best results can be attained by combining a vehicle like a donor advised fund with another vehicle such as a charitable remainder trust (CRT.)

A CRT is an example of a split interest trust. Such trusts are considered “split” because their value is broken into two components: a “life” interest and a “remainder” interest.  Charitable remainder trusts work in the following way:

  • The trust receives cash or property from the donor. 
  • At the time the CRT is implemented, the donor specifies:

1. the timespan for the trust, such as the donor’s lifetime or a specified term of years;

2. the trust’s income beneficiary (typically the donor and spouse) who will receive income from the trust (this is income generated by the “life” interest component);

3. the charity which will receive the value of the trust at the time specified in item #1 above (the “remainder” interest  component).

Benefits of a Charitable Remainder Trust to a Donor

Donors enjoy the following:

  1. Quarterly income during the timespan of the CRT for the beneficiary
  2. Potential for growth of income over time
  3. Investment diversification
  4. No capital gains tax on gifts of appreciated assets
  5. Charitable income tax deduction
  6. Gift and estate tax savings

Initial Hurdles to a Charitable Remainder Trust

In its traditional form described above, there are two hurdles to overcome:

  1. At the time the CRT is established, the donor must identify in the trust agreement the charitable beneficiary or beneficiaries.  This is often difficult for the donor to do; determining a deserving charity for a point of time that is 10 or 20 years in the future can be a concern. If the donor chooses to modify the designation at some point, it must be done in the trust and with the assistance of legal counsel and the ensuing expense.
  2. The family loses control over the assets once distributed to the specified charity.  Typically the donor’s financial advisor would no longer manage the assets once distributed.  

Coupling a Charitable Remainder Trust with a Donor Advised Fund

Having a charitable remainder trust working in conjunction with a donor advised fund (DAF) alleviates the hurdles and allows the following:

  1. Naming the donor advised fund as remainder beneficiary takes the pressure off of  identifying the ultimate charity at the start of the CRT.
  2. The donor’s family can continue to be involved in the charitable legacy of the donor.
  3. The donor’s financial advisor can continue to oversee the investment management of the remainder assets with only some DAF sponsors including AEF.
  4. Naming the AEF DAF as the remainder beneficiary provides great flexibility to the donor and advisor in case the advisor or donor changes wealth management firms at some point.
  5. The donor can also use the DAF as the vehicle for their lifetime charitable giving by funding it through distributions from their CRT.  The donor can contribute the income distribution into the donor advised fund and receive an offsetting income tax deduction, thus providing funds for immediate grant distributions while the donor is alive.
  6. If a donor wants to accelerate a CRT in order to give more to charity now or in the near future, they can cash out their income interest or collapse the CRT entirely into a donor advised fund. In this case, the donor may receive a onetime income tax benefit.

In short, the DAF enhances the CRT and provides considerable flexibility to the donor to engage in planned giving on terms that are ideal for them.

At American Endowment Foundation, we look forward to discussing your circumstances and helping determine the right path for you or your client. Contact us or call at 1-888-660-4508.

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Using a CRT for Better Giving