A Charitable Remainder Trust (CRT) is a powerful estate planning tool that allows you to transfer assets, provide income for yourself or other beneficiaries, and ultimately benefit a charity of your choice, making it a compelling option for blended families seeking both financial security and philanthropic impact.
What Exactly *Is* a Charitable Remainder Trust?
A CRT is an irrevocable trust where you, as the grantor, transfer assets – such as cash, stocks, or real estate – into the trust. The trust then pays you or other designated beneficiaries – like children from a previous marriage and a current spouse – a fixed or variable income stream for a specified period or for life. After that period, the remaining assets in the trust are distributed to the charity you’ve chosen. This arrangement provides an immediate income tax deduction for the present value of the charitable remainder, based on IRS tables and the age of the beneficiaries. In 2023, the annual exclusion amount is $17,000 per recipient, and this is often a key consideration when structuring a CRT for blended families.
How Can a CRT Help with Blended Family Dynamics?
Blended families often present complex estate planning challenges. You might want to ensure fair treatment of children from prior relationships while also providing for a current spouse. A CRT can navigate these sensitivities by allowing you to define income streams for different beneficiaries. For example, the current spouse could receive a fixed income, while children receive distributions based on specific milestones or needs. It’s important to remember that California is a community property state, meaning assets acquired during marriage are owned equally. A CRT allows you to designate how those assets, or separate property, will be distributed. The “double step-up” in basis for community property is a significant tax benefit for surviving spouses.
What are the Tax Advantages of Using a CRT?
Beyond the immediate income tax deduction, CRTs offer significant estate tax benefits. By removing assets from your taxable estate, you reduce potential estate taxes. While California doesn’t have a state-level estate tax, federal estate taxes still apply above a certain threshold (currently $12.92 million in 2023). CRTs are particularly effective for appreciating assets like stocks and real estate. You avoid capital gains taxes on the appreciation when the assets are transferred into the trust, and the trust can sell those assets without triggering immediate tax consequences. Remember that formal probate is required for estates over $184,500 in California, and probate fees can be significant, often a percentage of the estate’s value.
A Story of Unintended Consequences
I remember working with a client, David, who had a complex blended family situation. He wanted to ensure his children from a previous marriage were provided for, but also wanted to provide for his new wife, Sarah. He attempted to create a simple will, leaving everything to Sarah, with instructions that she would then distribute funds to his children. Unfortunately, Sarah faced financial difficulties after David’s passing and, despite her best intentions, couldn’t fulfill that promise. His children felt betrayed and a lengthy legal battle ensued, draining the estate’s resources. Had David utilized a CRT, the funds would have been securely earmarked for both Sarah and his children, avoiding the family conflict.
How Did a CRT Help Another Client?
Another client, Eleanor, a successful businesswoman with children from two marriages, came to us seeking a way to provide for her family while also supporting her favorite animal shelter. We established a CRT that provided Eleanor with a lifetime income stream. A portion of the income was also designated to provide annual support to her children from both marriages, while the remaining assets were earmarked for the animal shelter upon her passing. This arrangement allowed Eleanor to enjoy financial security, ensure her children were well-cared for, and fulfill her philanthropic goals, all within a structured and tax-efficient framework. She specifically appreciated that the trust could be structured to avoid probate, saving her family time and expense.
Important Considerations & Legal Requirements
It’s crucial to understand that CRTs are irrevocable trusts. Once established, you cannot change the terms. You must adhere to the “California Prudent Investor Act” when managing investments within the trust. Additionally, any no-contest clauses included in the trust are narrowly enforced and only apply if a beneficiary files a direct contest without “probable cause.” If there’s no will, the surviving spouse automatically inherits all community property, but separate property is distributed according to a specific formula. A valid California will requires a signature and two witnesses present at the same time, or a holographic will, which is entirely handwritten. Remember, an estate plan must grant explicit authority for a fiduciary to access and manage digital assets like email and social media.
36330 Hidden Springs Rd Suite E, Wildomar, CA 92595Steven F. Bliss ESQ. can help you navigate the complexities of estate planning, including the creation of Charitable Remainder Trusts tailored to your specific needs and blended family dynamics.
Don’t leave your legacy to chance. Contact us today at (951) 412-2800 for a consultation. Let us help you craft an estate plan that protects your loved ones, supports your charitable passions, and minimizes tax liabilities.