Question

If Keith had an objective to leave his estate to his heirs but would like to make use of the CRAT or CRUT for retirement income and the charitable tax deduction, what device could he use to replace the assets given to the CRAT or CRUT that would replace the lost assets to his heirs?

Answer 1

Answer:

Firstly we need to know what is CRT(Charitable Remainder Trusts) and then we will Understand the meaning of CRAT & CRUT and how does it works,

CRAT - Charitable Remainder Trusts

Families uses CRT to increase their incomes, save taxes and benefit charities. Whereas CRT lets you convert a highly appreciated asset like stock or real estate into lifetime income. It reduces your income taxes now and estate taxes when you die. You pay no capital gains tax when the asset is sold.

How CRT works, For better clarrification: You transfer an appreciated asset into an irrevocable trust. This removes the asset from your estate, so no estate taxes will be due on it when you die. You also receive an immediate charitable income tax deduction.

The trustee then sells the asset at full market value, paying no capital gains tax, and re-invests the proceeds in income-producing assets. For the rest of your life, the trust pays you an income. When you die, the remaining trust assets go to the charity(ies) you have chosen. That’s why it’s called a charitable remainder trust.

There are total 2 types of Income in CRT i.e. Income Based on Percentage & Fixed Income.

CRUT (Charitable Remainder Unitrust)

In CRUT you can receive a fixed percentage of the trust assets, in which case your trust would be called a charitable remainder unitrust. With this option,in this case the amount of your annual income will fluctuate, depending on investment performance and the annual value of the trust.

The trust will be re-valued at the beginning of each year to determine the dollar amount of income you will receive. If the trust is well managed, it can grow quickly because the trust assets grow tax-free. The amount of your income will increase as the value of the trust grows.

Sometimes the assets contributed to the trust, like real estate or stock in a closely-held corporation, are not readily market-able, so income is difficult to pay. In that case, the trust can be designed to pay the lesser of the fixed percentage of the trust’s assets or the actual income earned by the trust. A provision is usually included so that if the trust has an off year, it can make up any loss of income in a better year.

CRAT (Charitable Remainder Annuity Trust)

If your choose to receive a fixed income, in which case the trust would be called a charitable remainder annuity trust. This means that, regardless of the trust’s performance, your income will not change.

This option is usually a good choice at older ages. It doesn’t provide protection against inflation like the unitrust does, but some people like the security of being able to count on a definite amount of income each year. It’s best to use cash or readily marketable assets to fund an annuity trust.

Hence Both the option are available with the Keith CRAT or CRUT, but in this case as Keith is looking for retirement income so it has been assumed that he would be looking for a fixed income on fixed date considering as salary after the retirement i.e. he can opted for CRAT for safe returns.