Legal Definitions - charitable remainder trust (Charitable Remainder Irrevocable Unitrust)

A Charitable Remainder Trust (CRT), specifically a Charitable Remainder Irrevocable Unitrust, is a sophisticated estate planning tool that allows an individual (the donor) to make a significant gift to charity while also receiving income from the donated assets for a specified period, often for the rest of their life or a set number of years.

Here's how it generally works:

• The donor places substantial funds or assets (like appreciated stock, real estate, or other property) into an irrevocable trust. "Irrevocable" means the donor cannot change the basic terms of the trust or take back the gift once it's made.
• An independent trustee manages these assets.
• The donor, or other designated beneficiaries, receives regular income payments from the trust for a predetermined period.
• Upon the end of this period (e.g., the donor's death, the death of the last beneficiary, or after a set number of years), the remaining assets in the trust are distributed to a chosen charity or charities.
• A significant benefit is an immediate income tax deduction for the donor in the year the assets are contributed to the trust. This tax saving can sometimes be used to purchase a life insurance policy, providing a separate inheritance for heirs.
• The primary disadvantage is that the assets are permanently committed to the trust and cannot be reclaimed by the donor.

Here are some examples to illustrate how a Charitable Remainder Trust might be used:

• Example 1: Appreciated Stock for Retirement Income and University Support

  Eleanor, a retired engineer, owns a large portfolio of tech stock she purchased decades ago. It has appreciated significantly, meaning selling it would trigger a substantial capital gains tax. She wants to secure a steady income stream for her retirement and also leave a legacy to her alma mater's engineering program.

  How it illustrates the term: Eleanor establishes a Charitable Remainder Trust and transfers a portion of her highly appreciated stock into it. The trustee then sells the stock within the trust, avoiding immediate capital gains tax for Eleanor. The proceeds are reinvested, and the trust pays Eleanor a fixed percentage of its value each year for the rest of her life. She receives an immediate income tax deduction for the charitable contribution. Upon her death, the remaining assets in the trust are distributed to her university's engineering program, fulfilling her charitable goal while providing her with income during her lifetime.

• Example 2: Vacation Home for Family Income and Environmental Conservation

  The Chen family owns a vacation home that has significantly increased in value but they no longer use. They wish to convert this illiquid asset into an income stream for their later years and support a national park conservation fund.

  How it illustrates the term: The Chens transfer their vacation home into a Charitable Remainder Trust. The trustee sells the property, and because the sale occurs within the trust, the Chens avoid paying immediate capital gains tax on the appreciation. The trust invests the sale proceeds and provides the Chens with regular income payments for their joint lives. They receive an upfront income tax deduction. After both Mr. and Mrs. Chen pass away, the remaining funds in the trust are given to the national park conservation fund, ensuring their legacy of environmental support.

• Example 3: Business Sale Proceeds for Future Income and Medical Research

  Dr. Anya Sharma, a successful entrepreneur, is preparing to sell her medical device company. She anticipates a large payout but wants to diversify her wealth, create a long-term income stream for herself and her spouse, and contribute to a specific medical research foundation.

  How it illustrates the term: Before the sale of her company, Dr. Sharma contributes a portion of her company shares to a Charitable Remainder Trust. When the company is sold, the shares held by the CRT are sold without immediate capital gains tax to Dr. Sharma. The trust then invests the proceeds, and for a period of 20 years, it pays Dr. Sharma (and later her spouse) a percentage of the trust's value annually. She receives a substantial income tax deduction in the year of the contribution. At the end of the 20-year term, the remaining assets in the trust are distributed to the medical research foundation, supporting a cause she deeply believes in while providing her family with income for two decades.