The Retirement Charitable Remainder Trust as a Financial Planning Tool

The Retirement Charitable Remainder Trust as a Financial Planning Tool


Building Your Retirement Funds, Helping Your Favorite Charity

Everybody’s ideal retirement is a little different. Some want to travel full time, others are inclined to pursue a hobby, and some just want to build a quiet retreat. Whatever your retirement dreams, how would you like to simultaneously increase your retirement nest egg and build a substantial contribution for your favorite charity?

A Retirement Charitable Remainder Trust (Retirement CRT) could help you do both. If you already contribute the maximum amount each year to your qualified retirement plan and are looking for new ways to increase your tax-deductible contributions, the retirement CRT offers an answer. It allows you to protect additional retirement funds from taxes, while you create a long-term gift for your favorite charity.

A Retirement CRT is a popular option because it allows you to make one, or multiple, contributions of cash or appreciated assets to a trust. In return, you receive an immediate tax deduction for each of your contributions and a lifetime income stream in the form of annual distributions to yourself, which are based on the total asset value of the trust. At the end of the trust’s term, the assets are distributed to your chosen charitable organization.

The income tax deduction for the charitable contribution—the amount of which varies based on age, contribution amount, annual payment percentage, and current interest rates—is one of the major attractions of a standard CRT. However, in some cases, the standard CRT’s annual payment isn’t always beneficial because it is added to annual income and taxes must be paid. For people who will need the trust’s annual payment during their retirement years but don’t need the added income during their working years, a Retirement CRT offers a better solution.

The Benefits of a Retirement CRT

A Retirement CRT works much like a more traditional CRT, with a few significant differences. The Retirement CRT distributes an annual payment before retirement only if the trust’s investments have income. “Income” for this purpose is considered dividends and interest—not capital gains. This means you can create a Retirement CRT that is producing little or no income (by selecting the right investments), allowing the assets to appreciate during your working years. Upon a triggering event, such as a retirement date, or the sale of an illiquid asset, the Retirement CRT automatically switches to a standard CRT—one that distributes an annual payment based on a predetermined percentage.

With a Retirement CRT, you benefit in multiple ways:

  1. You can defer the annual payment during your working years, which cannot be done with a standard CRT.
  2. Since the assets in your Retirement CRT remain untapped, they appreciate faster due to the power of compounding. This means you will receive larger annual payments during your retirement, when the income may be most needed.
  3. The amount you ultimately leave to your favorite charity could be higher in a Retirement CRT, as well, because the assets have appreciated undiluted for a longer time.
  4. You still receive an immediate tax-deductible charitable contribution each time you make a contribution to your trust, just as you would under the terms of a standard CRT.

Here’s How a Retirement CRT Works

Let’s assume that for 10 years you and your spouse annually contribute $100,000 in appreciated securities to your Retirement CRT. For this, you receive an annual charitable tax deduction, reducing your taxes during each of the 10 years you make a contribution.

Your trust uses the contributed assets to buy stocks that pay no dividend. When you reach retirement age, the trust’s assets are restructured to a more balanced portfolio, and you begin collecting annual payments that are based on the value of the trust’s assets and the annual payment term you originally chose.

In this particular example, for either a standard or a Retirement CRT, your total contribution over the 10 years would be $1,000,000 and your total tax deduction would be $356,452. The power of compounding, however, favors the Retirement CRT. Assuming an 8% return, at age 60, your annual payment from a standard CRT would be $59,039, but the Retirement CRT’s assets are larger because no previous annual payments were required, so you would receive an annual payment of $78, 227, or an additional $19,188 per year.

As an added bonus, your chosen charity gains from the extra compounding in the Retirement CRT, too. The estimated value of the trust at the end of your joint life expectancy would be $2,663,540 for the Retirement CRT, but just $2,010,198 for the standard CRT.

Is a Retirement CRT for You?

You might want to consider one if you have a high level of income, you are already contributing the maximum to your qualified retirement plan, you need to reduce current income taxes, you have five to 15 years left before retirement, and you want to build a sizable charitable contribution.

Your relationship manager and your tax advisors can help you determine if a Retirement CRT is a smart solution for you and your family.


About The Author

As Vice President and Senior Wealth Advisor, Greg provides financial analysis to high net worth individuals. He is the author of several articles for various publications and nonprofit organizations on estate and financial planning subjects.