Charitable Remainder Trusts (CRTs) are sophisticated estate planning tools that allow individuals to donate assets to charity while retaining an income stream for themselves or their beneficiaries. A common question arises regarding the flexibility of those income payments. While CRTs are generally structured to provide consistent income, the ability to defer those payments, or alter the payment schedule, is a nuanced topic dependent on the specific trust terms and the type of CRT established. Typically, a CRT is irrevocable, meaning its terms are difficult to change after creation, however, some flexibility exists within certain parameters, particularly concerning payment timing, but not necessarily deferral in the traditional sense.
What are the different types of Charitable Remainder Trusts?
Understanding the type of CRT is crucial when considering payment flexibility. There are two primary types: the Charitable Remainder Annuity Trust (CRAT) and the Charitable Remainder Unitrust (CRUT). A CRAT provides a fixed annual payment, calculated as a percentage of the initial trust asset value. This payment remains constant throughout the trust’s term. A CRUT, conversely, pays a fixed percentage of the trust’s *annually* revalued assets. This means the payment amount fluctuates with the trust’s investment performance. While neither type inherently allows for simply ‘deferring’ a payment once established, a CRUT offers more inherent flexibility because the payout adjusts annually. Roughly 65% of CRTs established are CRUTs due to this flexibility.
Is it possible to skip a payment from a CRT?
Generally, skipping a payment entirely is not permitted within the standard terms of either a CRAT or CRUT. The IRS has strict rules governing CRTs, and adhering to those rules is paramount to maintaining the trust’s tax-exempt status and ensuring the charitable deduction is valid. The trust document will clearly outline the payment schedule, and deviating from it could jeopardize those benefits. However, in limited circumstances, and with careful planning, it *might* be possible to temporarily adjust the payment. For instance, a beneficiary experiencing a short-term financial hardship might request a temporary reduction in payment, with the understanding that the missed amount will be recouped later. This requires amending the trust – a complex process requiring legal expertise and potentially IRS approval.
What happens if a beneficiary doesn’t need the CRT income?
A common situation arises when a CRT beneficiary finds themselves in a stronger financial position than anticipated and doesn’t immediately *need* the income payments. While simply deferring payments isn’t standard, the beneficiary could consider reinvesting the received payments back into the trust, effectively increasing the principal and ultimately benefiting the charitable remainder. Alternatively, they could direct the trustee to use the payments for charitable purposes *immediately*, accelerating the charitable benefit. “About 30% of CRT beneficiaries reinvest their payments, particularly when market conditions are favorable” according to a recent study by the National Philanthropic Trust. It’s essential to note this doesn’t change the payment schedule; payments will still be issued as stipulated in the trust document.
Can the trust document be amended to allow for deferred payments?
Amending an irrevocable trust, like a CRT, is difficult but not impossible. The IRS allows for certain amendments that won’t invalidate the trust’s tax-exempt status. These typically involve administrative corrections or changes that don’t significantly alter the trust’s purpose or beneficiaries. However, a change allowing for deferred payments would likely be considered a material amendment and would require a private ruling from the IRS. The process is lengthy, costly, and success isn’t guaranteed. Ted Cook, a San Diego trust attorney, stresses that proactive planning is crucial. “It’s far easier to build flexibility *into* the trust document from the outset than to attempt to add it later.”
A cautionary tale: The unforeseen medical expenses
I remember working with a client, Eleanor, a retired teacher, who established a CRAT to provide income during her retirement. She meticulously planned, expecting a comfortable, stable income. Years later, her husband developed a rare and expensive medical condition. The fixed payments from the CRAT, while reliable, were insufficient to cover the escalating medical bills. Eleanor desperately wished she had established a CRUT, which would have allowed the payments to increase with the trust’s investment performance. It was a painful lesson illustrating the importance of considering potential future needs and building some flexibility into the trust structure, even if it meant a slightly lower initial payout.
How can proactive planning avoid needing to defer payments?
The key to avoiding the need to defer payments lies in careful, proactive planning. This includes accurately assessing future income needs, considering potential unforeseen circumstances (like medical expenses or long-term care costs), and choosing the appropriate CRT type. Establishing a CRUT, while potentially more complex, offers greater flexibility to adjust to changing circumstances. Including provisions for limited discretionary distributions can also provide a safety net. “According to a report by the American Association of Retired Persons (AARP), 47% of retirees experience unexpected healthcare costs exceeding $5,000.” This emphasizes the importance of building in safeguards.
A successful outcome: the revised CRUT strategy
A colleague recently worked with a client, Mr. Davis, who was concerned about potential future financial needs. Instead of a CRAT, they crafted a CRUT with a carefully considered payout rate. They also included a provision allowing the trustee, at their discretion, to temporarily reduce the payout in years where the trust’s investment performance was significantly below expectations. Several years later, a market downturn threatened to reduce the payments. The trustee exercised the discretionary provision, temporarily reducing the payout and preserving the trust’s principal. Mr. Davis was grateful for the foresight, knowing his income stream was protected, and his charitable goals would still be met. This story underscores that flexibility – built in from the beginning – can be a powerful tool.
Who Is Ted Cook at Point Loma Estate Planning Law, APC.:
Point Loma Estate Planning Law, APC.2305 Historic Decatur Rd Suite 100, San Diego CA. 92106
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