Transferring wealth to loved ones can carry a significant tax cost in Oregon, especially when appreciated assets like stocks or real estate are involved. A charitable remainder trust (CRT) is one estate planning tool that may help reduce that burden while supporting causes you care about.
What is a CRT?
A CRT is an irrevocable, tax-exempt trust designed to split benefits between noncharitable beneficiaries and tax-exempt charities. You fund the trust with appreciated assets, and the trust pays an income stream to you or designated beneficiaries for a term of up to 20 years or for life.
When the trust term expires, the remaining assets will go to a qualified charity. The IRS expects the value of the remaining assets to stand at 10% of the initial value of the assets when you placed it in the trust.
What are the pros?
A CRT can benefit both you as the donor and the charitable cause you support, while also providing financial advantages for your family. For instance, a CRT in your estate planning can:
- Defer capital gains tax on appreciated assets. When you transfer appreciated assets to a CRT and the trust sells them, the trust itself does not immediately pay capital gains tax on the gain. Instead, the gain is distributed to you over time through the income stream – taxed as you receive it based on the character of the income.
- Generate a steady income stream for you or named beneficiaries over a set period
Ultimately, it helps a charity you care about while making sure your family still gets financial support.
What are the cons?
When it comes to managing finances, there is almost always a trade-off. Some of them, in the case of a CRT, are as follows:
- You usually cannot take the money back out if you run into unexpected financial hardship.
- Any payments you or your family receive from the trust are usually taxed and must be reported on personal tax returns.
In any case, you and your family cannot use trust money to pay for personal expenses or borrow money from the trust.
Is a CRT right for your estate plan?
A CRT may be worth considering if you hold highly appreciated assets, want to generate income over time and have a charitable cause you want to support. Because these trusts are irrevocable and involve complex tax rules, discussing your situation with an estate planning attorney is an important step.