What is a Charitable Remainder Trust and its Tax Benefits?

By | February 1, 2014

A charitable remainder trust (CRT) may enable you to reduce your liability for income and estate taxes and diversify your assets in a tax-advantaged manner.

A charitable remainder trust is a certain type of irrevocable trust that makes annual or more frequent payments to you, typically until you die and you remain in full.  However, you can set up this trust, so that when you die, the remaining amount of money in the trust will go to charity. A number of advantages may flow from the charitable remainder trust to the taxpayer that can be enjoyed during your life and at death.


What is a Charitable Remainder Trust and its Tax Benefits?

The first big benefit is that you will obtain a current income tax charitable contribution deduction for the value of the charity’s interest in the trust. The charitable deduction is permitted when the trust is created even though the charity has not yet received anything.


Using a Charitable Remainder Trust

In addition, the charitable remainder trust can enhance your investment return because the charitable remainder trust pays no income taxes and because the charitable remainder trust can generally sell an appreciated asset without recognizing any gain. This enables the trustee to reinvest the full amount of the proceeds from any gain and thus generate larger payments to you for your life while also preserving the amount that the trust will donate to charity.


Estate Tax Charitable Deduction

The charitable trust will also be eligible for the estate tax charitable deduction if it passes to one or more qualified charities at your death. If you wish to replace the value of the contributed property for heirs who might otherwise have received it, you could use some of your cash savings from the charitable income tax deduction to purchase a life insurance policy on your life for the benefit of your heirs.

It is possible to pass on assets of greater value than those contributed to the charitable remainder trust. In this way, your heirs are not deprived of property they had expected to inherit. A charitable remainder trust is a very complex arrangement, but it is also an invaluable planning tool in the right circumstances.


Does the wash sale rule apply to options, ETFs and mutual funds?

Yes. Keep in mind that if the security has a CUSIP number, then it’s subject to wash-sale rule reporting. Switching from one ETF to the identical index in another fund or ETF could trigger the wash-sale rule. There are ways around this problem. For example, investors holding the Schwab S&P 500 Index Fund at a loss might consider switching into the more diversified Schwab Total Stock Market Index Fund. The same idea could apply to similar, but not substantially identical ETFs.