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Financial Planning > Tax Planning

CRT Restrictions

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Charitable Remainder Trusts can be funded with many types of assets. However, there exist very specific rules that need to be followed to ensure the viability of the tax benefits to the donor and the tax-exempt status of the CRT, as well.

For example, a CRT will lose its tax-exempt status if it has unrelated business taxable income (UBTI), which can be generated if the CRT accepts debt-financed property, or if it becomes involved in any business that is unrelated to its tax-exempt purpose. Also, if a donor contributes a partial interest of property to a CRT and retains an interest in the trust, the CRT may not qualify as a tax-exempt trust. As such, there will be a loss of the deduction and recognition of capital gain.

With very significant exceptions, a gift of a partial interest in property or any asset is not deductible. For example, a donor cannot give stock to a CRT and retain the voting rights in that stock.

Moreover, a donor cannot contribute S-Corporation stock to a CRT because a CRT cannot be a shareholder of an S-Corporation pursuant to the S-Corporation rules. Also, Statutory Incentive Stock Options (ISOs) cannot be given to a CRT because of statutory restrictions on transferability. Even if the instrument granting the stock options permits gifts of options to a CRT (a possibility with non-qualified stock options), it would not be a good idea to use the options because options are difficult to value and may not qualify for the income tax deduction.

And finally, qualified plan assets cannot be placed in a CRT because qualified plans are governed by ERISA anti-alienation rules. However, establishing a CRT at death and placing the qualified plan or IRA in the CRT at that time should not pose a problem.

Reproduced from National Underwriter Life & Health/Financial Services Edition, December 2, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.


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