As the federal gift and estate tax exemption continues to climb, the number of people subject to estate taxes is shrinking. For those with charitable giving goals, this may increase interest in charitable remainder trusts (CRTs). A lifetime CRT, for example, allows you to accelerate charitable gifts you’d otherwise make at death and enjoy substantial income tax benefits in the process. If taxes are less of a concern, a nonqualified CRT provides greater flexibility to provide for your family while leaving something for charity.
Qualified vs. nonqualified CRTs
Even though a qualified CRT’s exempt status enables it to provide significant tax benefits, those benefits can come at the cost of flexibility. Payouts are limited to a fixed amount or percentage, regardless of hardship or need, and the charity’s remainder interest generally must be at least 10% of the trust’s initial value.
Nonqualified CRTs offer little in the way of income, gift and estate tax advantages, but they need not comply with the requirements for a qualified CRT. That means they can distribute any amount of income and principal to your beneficiaries, in the trustee’s discretion.
Right for you?
Typically, nonqualified CRTs are established at death to take advantage of the stepped-up basis rules — the value of the initial contribution is stepped up to its fair market value, erasing any appreciation that might trigger capital gains taxes. It’s advisable to distribute at least all of the trust’s current income to avoid a steep income tax bill. Currently, trusts are subject to income taxes at the highest rate (39.6%), as well as the 3.8% net investment income tax, to the extent their income exceeds $12,400.
If you’re charitably inclined and gift and estate tax liability isn’t an issue, a nonqualified CRT may be right for you. Contact us with any questions regarding your charitable giving goals.