Charitable Remainder Trust Economics, and Deciding Whether to Use a CRT, Including for Plan and IRA Distributions

This article was originally posted on Steve Leimberg’s Estate Planning Email Newsletter as Archive Message #296.

Charitable remainder trusts (CRTs) are probably the most common type of trust where interests are divided or split between individuals and charity. With a CRT, non-charities (such as individuals) benefit first from the trust, and then later what remains after the payment to the individuals (the remainder) passes to or for charity. For several reasons, the use of such trusts has declined since the basic current provisions governing them came into the Internal Revenue Code by the Tax Reform Act of 1969, but that may change as explained below, particularly in the context of their use as beneficiaries of retirement plans.

There seem to be two primary reasons for the decline in CRT use. One is because rates of tax on capital gains have been reduced since 1969, so that the income tax exemption CRT provide may be less beneficial for the person who creates the trust and who contributes appreciated property to the trust, where it is anticipated that the trustee will sell that property. Second, Code provisions governing CRTs have been amended to make them less beneficial than they used to be. Probably, the major adverse change is the requirement that the actuarial tax value of the remainder to pass to charity, determined when the trust is created, must be at least 10% of the value of the assets contributed to the trust. A third adverse change, made by regulation rather than by statute, is the limitation of the ability to generate fiduciary accounting income (FAI) that may be distributed as a make-up provision in an income only with make-up charitable remainder trust (commonly called a NIMCRUT). Net income CRTs (NICRUTs) and NICRUTs with a make-up provision (NIMCRUTs) will both be explained below.

Nonetheless, a CRT may be useful in some situations especially if the asset contributed to the trust represents ordinary taxable income, such as payments from an IRA or qualified retirement plan, as discussed in more detail later.

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