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When to use charitable remainder trusts

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Charitable remainder trusts are back in style.

"The CRT is becoming popular again," says Rob O'Dell, co-founder of Wheaton Wealth Partners, which has offices in Wheaton, Ill. and Naples, Fla.

Clients who create CRTs donate assets -- usually appreciated -- to the trust, and then receive an income stream from those assets while they're in the trust. The trust can sell assets without owing tax on their sale, so creators receive income from the trust at the pretax value of the sold assets. When the trust expires -- either after a set number of years or when the donor dies -- the trust's remaining --assets pass to a designated charity or charities.

Donating assets to a CRT can remove them from the donor's estate. Moreover, transferring appreciated assets to a CRT not only defers tax on the gain, it provides a current partial tax deduction for the future charitable contribution.


"In the 1990s," O'Dell recalls, "CRTs were fantastic for income tax and estate planning. Estate tax exemptions were low and the tech boom was happening."

Following the 1990s boom in CRTs came a "lost decade" for the trusts, says O’Dell. The estate tax exemption was expanded, reducing that tax, and a lower tax rate on long-term gains made it less appealing to donate appreciated assets. Between 20015 and 2012, the number of CRTs fell to fewer than 106,000 from more than 116,000, according to the number of tax forms filed.

"We had clients with CRTs who dismantled them," O'Dell says.

Now, with a market rebound and higher taxes on gains, CRTs may offer income tax relief for some. "We have clients implementing CRTs to diversify out of equities that have produced good returns," O'Dell says.


CRTs can be used for more than equities, says Bryan Polley, an investment consultant with Allodium Investment Consultants in Minneapolis. His clients include a couple that owned a Minneapolis property worth $6 million; they faced a large capital gain on a sale.

"They wanted to make a substantial gift to a specific charity with the proceeds," says Polley, "so we discussed a CRT with them. Eventually, they gifted half of the property to a CRT and retained the other 50%. A developer agreed to buy the property from both parties, for $3 million apiece."

As a result, the clients received $3 million in cash as well as an immediate tax deduction.

The CRT's $3 million was invested in a diversified portfolio, Polley reports, and the couple will receive lifetime income from the CRT. After their deaths, the money remaining in the CRT will be distributed to their favored charity.

Polley says that for clients such as these, with highly appreciated assets and a clear charitable intent, the use of a CRT is "perfect."

Donald Jay Korn is a Financial Planning contributing writer in New York. He also writes regularly for On Wall Street.

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