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Charitable Remainder Trust: Protect Your Solo 401k Assets

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The Charitable Remainder Trust (CRT) isn’t for everyone but for some it’s a perfect fit with a Solo 401k or other retirement vehicle. A CRT is an irrevocable trust you move your assets in to. In exchange, you can receive an income steam and tax benefits today for donating it to a charity in the future.

Keep in mind the CRT is a part of your estate and succession plan. It’s a way to put personal and retirement assets into a trust. Once the assets are in the trust, you can take an income stream from the trust, and have a way to pass your assets onto heirs and a charity of your choice.

The Tax Reform Act of 1969 made the Charitable Remainder Trust possible. There are unique benefits when the trust owns the assets instead of you. There are two general types of CRTs:

  • The Charitable Remainder Unitrust (CRUT) pays you a percentage of the trust each month, quarter, or semiannually.
  • The Charitable Remainder Annuity Trust (CRAT) pays at the same frequency but pays a set amount instead of a percentage.

Have Your Cake and Eat It Too

Generally, a CRT provides an income stream for either a predetermined length of time or your entire lifetime. At the end of that time, the remainder of the trust is donated to the charity.

The life expectancy of the person receiving the payments (usually you as the trust grantor) heavily influences the tax deduction if it is a lifetime trust. Life expectancy is based on age, not health. If all the tax deductions cannot be used in one year, you can carry them forward for up to five years. Additionally, you can avoid capital gain tax when the CRT sells a property it owns. Once again, this allows you to defer taxes to enhance an income stream.

Like a Solo 401k, you are able to design a CRT to suit your retirement needs. Do this carefully because of the long-term implications and irrevocability of the trust.

Also keep in mind if your Solo 401k assets are in the CRT, you should work with your CPA to determine taxable implications before initiating an income stream.

There are several different trusts types to choose from and the manner that payments are made is highly flexible when first established. Payment options include set payments for the duration of the trust, a set percentage, and deferred payments.

Additionally, you do not have to be the beneficiary of the trust. You may decide on an heir or other person as the beneficiary. Under certain circumstances, this can be used to eliminate the high estate tax rates. Ultimately, there is ample flexibility setting up a charitable remainder trust.

Benefits of a CRT:

  • The trust incurs no capital gain tax. If you place an asset in the trust and sell it, you’ll be left with more money to earn interest or invest in another income generating investment.
  • Income tax deductions range from 30% to 70% of the gift amount depending on your age and the rate of pay out.
  • Lifetime payments can be substantially more than what the asset is currently generating. Some times as much as 2 or 3 times more.
  • Property or other assets are removed from the beneficiary’s estate unless the beneficiary is not the donor or spouse.
  • Eliminates property tax payments.

Basic Requirements of CRTs Are:

  • The maximum annual payout is 50%.
  • The minimum annual payout is 5%.
  • The present value of the remaining interest passing to the charity must be at least 10% of the trust.
  • Filing form 5227 with the IRS annually whether or not the CRT had unrelated business taxable income (UBTI).
  • A copy of the trust document must be sent to the IRS the first year form 5227 is filed.
  • A federal employer identification number must be established for the CRT.

Basic CRT Rules You’ll Understand

You have the freedom to donate to almost any charity that you want as long as it is valid under law. Qualifying charities include:

  • A community chest, corporation, trust, fund, or foundation organized or created under the laws of the United States, any state, D.C., or any possession of the United States. To remain compliant, organize and operate your charitable remainder trust for one or more of the following purposes:
    • Religious
    • Charitable
    • Educational
    • Scientific
    • Literary
    • The prevention of cruelty to children or animals.
    • Certain organizations involved with national or international sports competition also qualify.
  • War veterans’ organizations including posts, auxiliaries, trusts, or foundations organized in the United State or any of its possessions.
  • Domestic fraternal societies, orders, and associations operating under the lodge system.
  • Certain nonprofit cemetery companies or corporations.
  • A government organization that performs substantial government operations. These include U.S. possessions and Indian tribal governments.

Charitable Remainder Trust Mechanics

The mechanics of establishing a CRT begin with you deciding on the charity, the asset(s) going into the CRT, and the type of CRT you want. Other decisions you make are:

  • Designating the beneficiaries.
  • Choosing the trustee.
  • Decide the rate of pay out within established limits.
  • How long will you establish the trust for?

As you would expect with any tax-sheltered vehicle, the IRS has prohibited transactions you need to consider. But these are similar to what happens with any Solo 401k. The most common examples are:

  • A disqualified person may not sell assets to the trust.
  • Anyone who is disqualified may not buy assets from the trust.
  • Disqualified persons may not do business with the trust.

Disqualified people include the donors, beneficiaries, trustee, lineal descendants, ascendants, and business entities that they have a substantial relationship with the donor or trust. The IRS further defines specific relationship in the Internal Revenue Code.

IRS Resources on Charitable Remainder Trusts

Here, you’ll find issues the IRS looks for regarding Charitable Remainder Trusts: the Income Deferral Abuse and Other Issues.

A charitable remainder trust is an irrevocable trust. It’s essential that you work with your estate planner before adding assets from your Solo 401k to a CRT. Once the assets are in the trust, you cannot take back what you have given.

Have questions about your Solo 401k? Solo 401K experts at Nabers Group will help you get your retirement funds into your control, where they belong. Contact us here.

Disclaimer: These resources are for informational purposes only. They do not constitute an endorsement or an approval by Nabers Group LLC of any of the products, services, or opinions of any corporation, organization, or individual. Nabers Group LLC bears no responsibility for the accuracy, legality, or content.

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