Charitable Remainder Trust in Miami, Florida

A charitable remainder trust (CRT) is a tax-exempt irrevocable trust that provides an income stream to the donor or other non-charitable beneficiaries for a specified period, after which the remaining trust assets pass to one or more charitable organizations. CRTs offer a unique combination of income tax, capital gains tax, and estate tax benefits that make them an attractive planning tool for charitably inclined individuals in Florida. At the Law Offices of Albert Goodwin, PA, we help clients throughout South Florida establish charitable remainder trusts that achieve both their philanthropic goals and their financial objectives.

How a Charitable Remainder Trust Works

The basic structure of a CRT involves three key elements: the donor who creates and funds the trust, the income beneficiary who receives periodic payments from the trust during the trust term, and the charitable remainder beneficiary that receives the trust assets when the trust terminates.

The donor transfers assets, often highly appreciated property, to the CRT. The trust is exempt from income tax under IRC § 664, which means that when the trustee sells the contributed assets, no immediate capital gains tax is owed. The trustee reinvests the sale proceeds and makes periodic distributions to the income beneficiary (who is often the donor and/or the donor's spouse) according to the trust terms. At the end of the trust term, which can be measured by a specified number of years (not exceeding 20) or by the lifetime of one or more individuals, the remaining trust assets are distributed to the designated charity.

The donor receives an income tax charitable deduction in the year the CRT is funded, equal to the present value of the charitable remainder interest. This deduction is calculated using IRS actuarial tables and depends on the payout rate, the term of the trust, the applicable federal rate, and the donor's age (if the term is measured by the donor's lifetime).

CRAT vs. CRUT: Two Types of Charitable Remainder Trusts

There are two types of charitable remainder trusts, each with different payout structures and planning implications.

Charitable Remainder Annuity Trust (CRAT)

A charitable remainder annuity trust pays the income beneficiary a fixed annuity amount each year, expressed as a percentage of the initial fair market value of the trust assets at the time of funding. The annuity amount does not change regardless of the trust's investment performance. If the trust assets grow, the excess growth benefits the charitable remainder. If the trust assets decline, the fixed payments continue and may deplete the trust more quickly.

CRATs are best suited for donors who want a predictable, fixed income stream. However, because the annuity amount is fixed, it provides no inflation protection. Additionally, a CRAT cannot receive additional contributions after the initial funding, which limits its flexibility.

Under the IRS regulations, the annuity amount must be at least 5 percent and no more than 50 percent of the initial fair market value of the trust assets. Furthermore, the actuarial value of the charitable remainder interest must be at least 10 percent of the initial fair market value of the assets contributed to the trust. If the payout rate is too high or the term is too long, the 10 percent remainder test may not be satisfied, and the trust will not qualify as a CRT.

Charitable Remainder Unitrust (CRUT)

A charitable remainder unitrust pays the income beneficiary a fixed percentage of the trust's net fair market value, revalued annually. Because the payout is based on a percentage of the trust's current value, the actual dollar amount of distributions will fluctuate from year to year depending on the trust's investment performance. In years when the trust grows, distributions increase; in years when the trust declines, distributions decrease.

CRUTs are generally more flexible than CRATs. They allow additional contributions, provide a natural hedge against inflation (because distributions increase as the trust value grows), and are better suited for trusts funded with assets that may take time to sell, such as real estate or closely held business interests. Several variations of the CRUT exist, including the net income CRUT (NICRUT), the net income with makeup CRUT (NIMCRUT), and the flip CRUT, each of which modifies the distribution formula to address specific planning situations.

A flip CRUT is particularly useful when the trust is initially funded with an illiquid asset such as real estate. The trust pays out only its net income (or nothing, if there is no income) until a specified triggering event, such as the sale of the contributed property. After the triggering event, the trust "flips" to a standard unitrust and begins paying the fixed percentage of the trust's annual value. This structure avoids the need to sell illiquid assets quickly or at a discount to meet distribution requirements.

Tax Benefits of a Charitable Remainder Trust

Income tax deduction. The donor receives a charitable income tax deduction equal to the present value of the remainder interest that will ultimately pass to charity. The deduction is subject to the percentage limitations applicable to charitable contributions under IRC § 170, which depend on the type of property contributed and the type of charitable organization. For cash contributions to public charities, the deduction is generally limited to 60 percent of the donor's adjusted gross income, with a five-year carryforward for any excess deduction. For contributions of appreciated capital gain property, the limitation is generally 30 percent of AGI.

Capital gains tax avoidance. When the CRT sells appreciated assets, no capital gains tax is owed at the time of the sale because the trust is tax-exempt. This is one of the most powerful features of a CRT. For example, if a donor contributes stock with a basis of $100,000 and a fair market value of $1 million, the CRT can sell the stock for $1 million and reinvest the entire amount without paying any capital gains tax on the $900,000 gain. By contrast, if the donor had sold the stock personally, they would owe federal capital gains tax on the gain (and potentially the 3.8 percent net investment income tax), significantly reducing the amount available for reinvestment.

Estate tax reduction. Assets transferred to a CRT are removed from the donor's taxable estate. If the donor is the income beneficiary and the trust term is measured by the donor's lifetime, the trust assets are included in the donor's gross estate for estate tax purposes, but the estate receives a charitable deduction for the value of the charitable remainder interest. If the donor's spouse is the income beneficiary, the trust may qualify for the marital deduction as well. For donors whose estates exceed the federal estate tax exemption, a CRT can reduce the overall estate tax liability.

Payout Rates and the 10 Percent Remainder Test

Both CRATs and CRUTs must satisfy certain payout requirements. The annual payout rate must be at least 5 percent and no more than 50 percent. Additionally, the present value of the remainder interest that will pass to charity at the end of the trust term must be at least 10 percent of the fair market value of the assets initially contributed to the trust.

The 10 percent remainder test can be challenging to satisfy when interest rates are low, payout rates are high, or the donor is young (meaning the trust term measured by the donor's lifetime could be very long). In a low-interest-rate environment, higher payout rates are more likely to fail the 10 percent test because the present value of the charitable remainder is calculated using the Section 7520 rate, which is 120 percent of the applicable federal midterm rate. When interest rates rise, it becomes easier to satisfy the 10 percent test because the present value of the remainder interest increases.

Working with an experienced attorney and financial advisor to model different payout rates, terms, and interest rate assumptions is essential to ensuring that the CRT qualifies and achieves the donor's objectives.

Florida Philanthropic Planning with CRTs

Florida's lack of a state income tax makes CRT planning particularly attractive for Florida residents. The income tax deduction generated by the CRT reduces the donor's federal income tax liability without any state tax complications. Furthermore, the trust's tax-exempt status means that trust income is not subject to state income tax in Florida (or in most other states, depending on where the trust is sitused and the applicable state tax rules).

Florida is home to numerous qualified charitable organizations, community foundations, universities, hospitals, and other nonprofit entities that can serve as the charitable remainder beneficiary of a CRT. Donors who wish to support specific causes in South Florida, whether education, healthcare, the arts, environmental conservation, or social services, can name their preferred charities as remainder beneficiaries and create a lasting philanthropic legacy.

A CRT can also be combined with other estate planning tools. For example, some donors use the income tax savings from the CRT to fund premiums on a life insurance trust (ILIT) that replaces the charitable gift for the donor's heirs. This "wealth replacement" strategy allows the donor to benefit from the CRT's income stream and tax savings, leave a charitable legacy, and provide their family with a tax-free life insurance benefit that replaces the assets transferred to charity.

CRT Administration

A CRT requires ongoing administration throughout its term. The trustee must value the trust assets annually (for CRUTs), make timely distributions to the income beneficiary, file annual trust returns (Form 5227), and comply with all applicable IRS regulations. The trustee must also invest the trust assets prudently, balancing the income needs of the current beneficiary with the obligation to preserve the remainder for the charitable beneficiary.

The choice of trustee is important. The donor may serve as trustee of the CRT, but this requires careful adherence to the trust terms and distribution requirements. Alternatively, a corporate trustee, a financial institution, or the charitable remainder beneficiary may serve as trustee, providing professional management and administrative oversight.

Contact a Florida Charitable Remainder Trust Attorney

A charitable remainder trust offers a rare combination of income, tax savings, and charitable giving that can benefit both you and the causes you care about. At the Law Offices of Albert Goodwin, PA, we help Florida residents design and implement CRTs that are tailored to their financial circumstances and philanthropic goals. Our office is located at 121 Alhambra Plz #1000, Coral Gables, FL 33134. Call us at 786-522-1411 or email us at [email protected] to schedule a consultation about how a charitable remainder trust can fit into your estate plan.