CRTs are a win-win for the charity and donor, especially those who have highly appreciated long-term assets to spare.
Here's why: Say you have assets, such as stock, that you acquired for $20,000, and now are worth $100,000. If you sell them, you will be hit with a 15 percent capital gains tax on the $80,000 gain, or $12,000. But if you establish a charitable remainder trust, your designated nonprofit charity gets the full $100,000 tax-free to reinvest and you get an annuity of anywhere from 5 percent to 50 percent of the fair market value of the trust property, plus, in the case of a CRUT, participation in the portfolio's performance.
The downsides of charitable trustsThese win-win charitable trusts are not for everyone, however.
Why some people don't like charitable remainder trusts:
- They are irrevocable. Once established, it can be nearly impossible to undo a charitable remainder trust.
- The payout is largely fixed. Once you determine the percentage of the trust to which your annuity is tied, you can't change it or access the principal, even if you should suddenly need additional income in the future.
- Unitrust investment risk. If the underlying investments should tank, your annuity income could shrink.
- Charitable remainder trusts can be complicated. Administration of the trust involves holding, investing and distributing trust funds, filing their unique IRS tax returns and state tax returns, and in some states, issuing an annual report to beneficiaries. Typically, the trustee is a bank, a trust company, the charity or even the donor. Warning: It can be time-consuming and difficult to serve as trustee without knowledgeable guidance.
"It's really important to get a savvy and reputable trustee, because it can be really complicated," says Sadler. "The tax situation around the income that comes out of a charitable remainder trust is taxed on a four-tier tax system. It's a very, very complicated thing for a trust manager to manage."
Minimum gift thresholdsThomas Ray, a St. Louis attorney and author of "Charitable Gift Planning," says charitable remainder trusts hold a special appeal for baby boomers.
"I think the boomers don't trust institutions," says Ray. "Their parents, the 'Greatest Generation,' were willing to just make a gift and let the church decide how to divvy it up. Boomers don't do that; they want to know where that money is going, how it's going to be used. They are just as generous and maybe more so than the preceding generation, but they really want a lot more control over the way their dollars are used by the charities."
In terms of minimum gift thresholds, CRTs fall somewhere between the stratospheric giving levels of foundations, from $10 million to $20 million, and supporting organizations at $10 million, to the downright affordable donor-advised funds at $10,000 or more, and charitable gift annuities, fom $10,000 to $25,000.
"What you have to consider any time you create a trust is whether the trust has sufficient assets to cover its expenses and still provide a benefit for the beneficiaries," says Ray. "The rule of thumb now is that you shouldn't do a charitable remainder trust unless you're going to put at least $100,000 of assets into it. For a charitable lead trust, you're talking more in the $250,000 to $500,000 range."
Though he declined to be specific about the cost to establish a CRT, Ray agreed that attorney fees could be less than $5,000, depending on the assets involved.
Looney is pleased that he backed his beloved alma mater with a gift that keeps on giving -- to him.
"Overall, the gratitude I feel for CU is not negotiable. The University of Colorado can't revoke the education they gave me, so let's be fair about it. The key is for the donor to just enjoy doing it. To me, if giving money isn't fun, there's no reason in the world to give it away."