For philanthropic-minded investors hoping to minimize taxes while generating income for themselves or their heirs in New York, a charitable remainder trust (CRT) is an effective planning tool. A CRT is a type of trust that allows the grantor to transfer assets into it, receive income from those assets for either their lifetime or a set term of years, and generate a charitable tax deduction.
How CRTs work
First, the investor has to transfer appreciated properties, such as stocks, real estate or a closely held business, to an irrevocable trust. Next, the designated trustee (appointed by the investor) will sell those assets and reinvests the proceeds into a diversified portfolio. The investor will then receive payments at least annually, either for their lifetime or a set term of years – the length of which the grantor determines at the time of setting up the trust. The remaining assets will go to the investor’s chosen charities at the end of the trust’s term.
By utilizing this estate planning tool, you can bypass capital gains taxes as the trust itself will cover those costs, relieving you of any financial burden. Further, you can receive a charitable deduction when setting up the trust.
Types of CRTs
There are two main types of CRTs in New York – Charitable Remainder Annuity Trusts (CRATs) and Charitable Remainder Unitrusts (CRUTs). The key difference between them is that a CRAT pays out a fixed payment amount each year regardless of what happens to its underlying investments, while payments from a CRUT vary depending on the performance of its portfolio.
Key uses for CRTs
Investors in New York set up CRTs to:
- Gain an immediate tax deduction when setting up the trust
- Maximize current income for yourself or your heirs with life-long payments from the trust
- Avoid capital gains taxes when transferring appreciated assets into the trust
- Create a philanthropic legacy that will benefit charities in New York after death
- Convert non-diversified holdings (e.g., closely held business) into diversified investments
Overall, the CRT is a powerful estate planning tool for New Yorkers looking to maximize their returns while minimizing taxes and leaving a lasting impact on charitable causes. With careful planning, you can make an informed decision that meets your personal financial goals.