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Charitable Remainder Trusts

  • Charitable Remainder Trusts

    A Charitable Remainder Trust (CRT) is a planned gift where a donor irrevocably makes a gift to a charity or charities through a trust agreement. The donor contributes cash, securities, real estate or other investments like term deposits or certificates of deposit to the trust and receives an immediate donation receipt for the present value of the donated remainder interest.

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    Janice Link

    A trustee manages the trust. If the trust assets are income-producing, the trustee will pay the net income to the donor or other named beneficiaries for life or for a term of years.
       
    When the trust terminates (upon the death of beneficiaries or expiry of the term), the trustee gives the remaining trust assets to the charity.
       
    Additional trust tools (Alter Ego Trusts and Joint Partner Trusts) are available to people aged 65 and older. With an Alter Ego trust, only the settlor (person transferring property into the trust) may receive income from the trust while alive. With a Joint Partner Trust, only the settlor and spouse may receive income from the trust.   

    Benefits to you?

    • As donor, you receive an immediate donation receipt for the present value of the donated remainder interest. Generally speaking, older donors will receive a larger receipt.
    • If you are the income beneficiary, you receive regular income from the trust for life or for a term of years.
    • If first you and then your surviving spouse is the income beneficiary, you recognize only the capital gain attributable to the donated remainder interest when appreciated property is contributed to the trust.
    • It may be possible to eliminate capital gains tax entirely at the time appreciated assets are contributed to the CRT, by ensuring that the CRT meets the definition of an Alter Ego or Joint Partner Trust.
    • Assets held in the trust are not subject to probate fees and are less susceptible to challenge than a charitable bequest.
    • If the trustee is someone other than you, you are freed from management responsibility for the trust assets.
    • The trust agreement can be kept private, unlike a will, which may become a public document upon the donor’s death.
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    Nora Layard

    Who can create Charitable Remainder Trusts (CRTs)?

    This form of gift tends to be attractive to upper-income donors over the age of 60 and especially donors over 75 who want to help an organization, have extensive holdings, are in a high marginal tax bracket (will benefit from immediate tax relief) and have the ability to donate some of their assets. People who wish to receive a steady income for life (or who wish to provide income for a loved one) and be freed of managing investments find this form of giving especially satisfying and beneficial.   

    How can I create a CRT?

    The trust is created through a trust agreement signed by the donor and trustee. The trustee may be a trust company, an individual named by the donor, or the donor.
       
    Use an actuary to ensure accurate, objective, third-party calculation of the donation receipt. This provides professional support if Canada Revenue Agency questions the valuation. 

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    Important considerations

    To qualify for a donation receipt, contributions to the trust must be irrevocable. Once contributed, the donor has given up control over the assets and cannot get them back. No encroachment on trust assets/invested capital is permitted.
       
    Most financial institutions will not establish a trust for amounts under $100,000 (in some cases, more) and they charge set-up and ongoing fees to manage the trust. This affects the amount of income the donor receives. There may also be discharge fees when the trust is terminated.
       
    Where a donor contributes appreciated publicly traded (listed) securities to a charitable remainder trust of which the donor (or the donor and a spouse) is the income beneficiary, the donor will be taxed on 50% (instead of having no taxable capital gains) of the gain attributable to the remainder interest.
       

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    Nora Layard

    While there may be no capital gains tax when appreciated assets are transferred into an Alter Ego or Joint Partner Trust, there will be tax implications at death, for example:

    • Alter Ego Trust: when the settlor dies, any gains in the trust property will be taxable to the trust at the highest individual marginal tax rates.
    • Joint Partner Trust: when the settlor’s surviving spouse dies, any gains in the trust property will be taxable to the trust at the highest individual marginal tax rates.

    Planned gifts can provide beneficial results for a donor but, in order to ensure that all relevant issues have been considered and addressed and that all Income Tax Act, Canada provisions and regulations are met, prospective donors should seek qualified legal and accounting advice.


    Give Green Canada acknowledges and thanks Lorna Somers and Frank Minton for pre-approving the use of their book Planned Giving for Canadians as the basis for the information provided about different types of gifts.

     

     

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