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Clear the new hurdle for creating a CRT

by on
in Small Business Tax,Small Business Tax Deduction Strategies

If you plan to use an increasingly popular estate-planning tool—a charitable remainder trust (CRT)—be aware that you'll need to jump through some new hoops to preserve the trust's tax benefits.

Specifically, if you create a CRT after June 27, you must obtain a signed waiver from your spouse to launch the trust. Otherwise, your current charitable tax deduction goes down the drain. (IRS Revenue Procedure 2005-24)

With a CRT, you transfer assets to the trustee of a charity while you (or another beneficiary) retain the right to draw income from the assets. Upon your death (or a specified term), the remaining assets go to the charity.

The immediate impact: Based on the value of the remainder interest, you can claim a current tax deduction in the year of the transfer. Plus, you pay no tax on the buildup of funds.

But the IRS is concerned that CRTs could conflict with some state laws that prevent a surviving spouse from being disinherited. That's why it instituted the new waiver requirement, even though it's highly unlikely a surviving spouse would pursue a claim from CRT funds.

If you created a CRT after June 27, it will remain valid with a spousal waiver unless your spouse actually exercises a right of election against the trust assets. Note, however, that such waivers are required for a change of address, marriage or any other occurrence that would result in a claim for a surviving spouse.

Bottom line: Don't overlook this new required paperwork: If the trust fails to qualify, you'll forfeit the up-front tax deduction and the funds will be included in your taxable estate. Plus, the trust will be taxed on capital gains from the sale of assets as well as the fund accumulation. A tax disaster!

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