Higher Interest Rates Reignite Appeal of Charitable Remainder Trusts

Are you planning to leave a lasting charitable legacy while securing income for life? Rising interest rates make Charitable Remainder Trusts (CRTs) a particularly attractive option again. CRTs offer a win-win: steady income payments for you or your loved ones throughout your lifetime, plus a significant upfront charitable income tax deduction thanks to the immediate transfer of appreciated assets to the trust. 

Decoding the Mechanics of CRTs

A CRT operates as an irrevocable trust wherein you contribute stocks or other assets. This trust, in turn, disburses income to you, your spouse, or other beneficiaries for either your lifetime or a term of up to 20 years. Subsequently, the remaining assets find their way to one or more charitable causes. As you fund the trust, a charitable income tax deduction, subject to applicable limits, is conferred based on the present value of the charitable beneficiaries' remainder interest.

Two distinct types of CRTs exist, each with its own set of advantages and considerations:

• Charitable Remainder Annuity Trust (CRAT): Guarantees fixed payouts, ranging from 5% to 50% of the trust's initial value, without permitting additional contributions post-funding.
• Charitable Remainder Unitrust (CRUT): Also pays out a fixed percentage (5% to 50%) but recalculates annually, accommodating additional contributions. CRUTs present the advantage of payouts adjusting for inflation and the flexibility of extra contributions. However, it comes with the potential drawback of reduced payouts if the trust's value declines.

Navigating CRTs in a High-Interest Rate Environment

For a CRT to qualify as a bona fide charitable giving vehicle, IRS guidelines mandate that the present value of the charitable beneficiaries' remainder interest be a minimum of 10% of the trust assets' value at the time of contribution. The computation involves estimating the present value of annual payouts and deducting that from the contributed assets, considering factors such as trust term, annual payouts, and the IRS-prescribed Section 7520 rate.

In recent years, low interest rates posed challenges for many CRTs to meet this 10% threshold. However, as interest rates rise, it becomes more feasible to meet the criteria, enhancing annual payouts or extending the trust term without jeopardizing the trust's legitimacy.

The Opportune Moment for a CRT

HoganTaylor Estate Planning Services

HoganTaylor estate planning professionals leverage their tax and business advisory expertise to help individuals accomplish goals and minimize tax burden. If you have any questions about the content of this publication, or if you would like more information about HoganTaylor's Estate Planning services, please contact Dan Bomhoff, Estate Planning  Lead.

INFORMATIONAL PURPOSE ONLY. This content is for informational purposes only. This content does not constitute professional advice and should not be relied upon by you or any third party, including to operate or promote your business, secure financing or capital in any form, obtain any regulatory or governmental approvals, or otherwise be used in connection with procuring services or other benefits from any entity. Before making any decision or taking any action, you should consult with professional advisors.