A Charitable Remainder Trust (CRT) is an irrevocable trust that essentially generates a stream of income for the trust holder or donor to the CRT, with the remainder of the assets going to a favorite charity or charities. Once the CRT is around ten years old, it should be reviewed to ensure it still aligns with your preferences or values since several changes can happen in 10 years, both financially and personally. Many misalignments can happen if CRTs are created but never reviewed.
What are CRT Misalignments?
CRT misalignments usually occur at or around 10 years after the creation of the CRT. Aside from the fact that the CRT may have run its course as a trust, personal and financial problems might arise. You could go through divorce, death of a spouse, change in health, desire to transfer more assets for family, grow your family, or simply have the desire to simplify your financial affairs.
Some financial problems that might cause misalignments for CRTs include: (1) the desire for liquidity; (2) not needing or wanting the CRT income anymore; (3) rising interest or tax rates; (4) stock market volatility; or (5) desire to liquidate your assets or have an underperforming NIMCRUT. Regardless of the reason for misalignment, you want to make sure to review your CRTs once it turns 10 years old.
Can I Fix These Misalignments?
There are options for you if your CRT is not aligned with your current financial or personal situations. The IRS considers the income you receive from the CRT to be a capital asset. Accordingly, just like obtaining other capital assets like stocks and bonds, the CRT income can be taxed, bought, sold, given to charity, or used to create a new CRT. This is known as secondary planning. The older the CRT, the older the client and the higher the likelihood that the CRT secondary planning is a better option.
When CRT holders no longer need or want the CRT, most holders often give the CRT income to charity. However, a better option would be to do a “rollover” instead.
If you would like to sell your CRT income interest, you can sell it to a third-party buyer. You, or your heirs, would then receive cash while the buyer receives the CRT and its income. Another option to reach your CRT goals is to gift the income interest. By doing this, you will be eligible to receive a tax deduction equal to the IRS calculated value of the CRT generated income interest, while giving the income to charity. The last option would be a CRT rollover. This would allow you to use your income interest to create a new CRT with your children or other family members named as income beneficiaries. This would create an income stream for your heirs.
If you are interested in getting the most financial value when exiting your CRT, selling the income interest to the third party would be your best option. When you sell it, the value of the income interest usually exceeds the IRS formula used to value an income interest with the determination option. Regardless of whether you chose to realign your CRT or not, once the CRT is around ten years old, it should be reviewed.