Charitable Gifts that Pay Income
Charitable remainder unitrusts (CRUTs) and charitable remainder annuity trusts (CRATS)
Charitable remainder trusts (both CRUT and CRAT) allow your client to convert a highly appreciated asset like stock or real estate into a charitable gift that pays them income for the rest of their lives. It reduces their income taxes now and estate taxes when they die. They pay no capital gains tax when the asset is sold.
- How does it work?
- Your client transfers an appreciated asset into an irrevocable trust naming the Community Foundation as trustee. The asset is removed from your client’s estate, so no estate taxes will be due on it when they die. Your client also receives an immediate charitable income tax deduction.
- The trustee (the Community Foundation) then sells the asset at full market value, paying no capital gains tax, and re-invests the proceeds in income-producing assets. For the rest of your client’s life, the trust pays them an income. When they die, the remaining trust assets go to the Community Foundation and will be used to support the charitable cause(s) your client designated before his death.
- The difference between a CRUT and a CRAT is that the income payments received from a CRUT are variable and based on a % payout (not less than 5%) stated in the trust agreement. CRAT income payments are fixed. Donors can add to the principal amount of a CRUT, whereas no additional contributions are allowed to a CRAT.
Charitable remainder trust (CRT) example:
- Client profile:
- Ted and Claire are both retired and own an office building in downtown Everett. They have a wide variety of charitable interests ranging from parks to libraries to human service organizations. They are tired of maintaining this piece of property, and want to sell it, but do not want to pay the significant capital gains taxes that this sale would incur.
- Client opportunity:
- Ted and Claire placed the property in a charitable remainder annuity trust and named the Community Foundation as trustee and beneficiary.
- They received a federal income tax charitable deduction up to 30% of their AGI in the year the trust was funded. Any amounts that exceeded that 30% ceiling carried the deductions over for five additional years.
- The trust sold the property and invested the proceeds of the sale in the Community Foundation’s larger investment pool. As charitable remainder trusts are exempt from paying capital gains tax, Ted and Claire avoided paying capital gains tax on the sale of the building.
- The trust pays Ted and Claire a set dollar amount in income four times a year for the rest of their lives.
- After Ted and Claire die, the Community Foundation will receive the remainder value of the trust. The Community Foundation will use these funds to provide grants and community leadership initiatives for nonprofits throughout the area.
Please contact Elena for further details about this type of gift.
Gifts of various trust instruments received by the Community Foundation are often subject to the approval of the Community Foundation’s Board.