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Rising Interest Rates May Benefit Charitable Remainder Trusts

Although rising interest rates are dampening real estate sales, they may be a blessing for charities who are the beneficiaries of charitable remainder trusts.

A charitable remainder trust (CRT) is a trust that pays an annual payment to the donor during the term, with the remainder passing to charity. A CRT may be an annuity trust (CRAT) where the donor receives a fixed annuity or an unitrust (CRUT) where the donor receives a distribution based on the value of the trust each year.

 The donor can get an upfront income tax deduction for the charitable portion of the transfer.

 CRTs are frequently used to diversify a donor’s investment portfolio.  If appreciated assets are transferred to the trust and sold, no income tax is due on the sale. The trustee can sell trust assets and reinvest in a more diversified portfolio. In particular. some donors with appreciated real estate can donate real estate which can be sold tax-free by the CRT and the CRT can invest in other assets such as stocks that may have liquidity to be used for the annual payment to the donor.

Because the value of the donor’s retained annuity is lower when interest rates are high, the deductible charitable portion is higher when interest rates are high. This remainder interest passing to charity is valued at its present interest using the current tax interest rate (known as the Section 7520 rate). The higher the Section 7520 rate is, the higher the actuarial value of the remainder interest is, and the higher the charitable deduction available to the grantor of the CRT is. 

 It is also easier to create a qualifying CRAT when interest rates are high. A CRAT is required to be structured so that there’s a less than 5% probability that the charity will be left with nothing.


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Richard Pon CPA, CFP