Charitable Remainder Trusts (CRTs) are powerful estate planning tools allowing individuals to donate assets to charity while retaining an income stream; however, the question of whether a CRT can make payments “in kind” – meaning with assets other than cash – rather than cash is a nuanced one, and requires a careful consideration of IRS regulations and trust document stipulations.
What are the rules around CRT distributions?
Generally, CRTs *can* make distributions in kind, but with significant restrictions. The IRS mandates that distributions from a CRT must be valued at fair market value as of the date of distribution. This means any non-cash asset distributed must be appraised to determine its value for both income tax and gift tax purposes. Furthermore, the IRS scrutinizes “bargain sales” where assets are distributed at values below fair market value, as these can be recharacterized as constructive distributions leading to immediate tax consequences. Approximately 65% of CRTs initially fund with appreciated assets like stock or real estate, meaning in-kind distributions are frequently contemplated, but require meticulous documentation. “The key is ensuring the recipient charity can actually *use* the non-cash asset,” explains Steve Bliss, an Estate Planning Attorney in Wildomar, “a donation of a vintage tractor to a hospital isn’t particularly useful, and could trigger complications.”
What happens if a CRT distributes illiquid assets?
Distributing illiquid assets, like real estate or closely held stock, presents unique challenges. The charity receiving the asset may not want it, or may lack the resources to manage it. This can lead to a forced sale at an unfavorable price, diminishing the value of the charitable remainder and potentially triggering tax liabilities. I once worked with a client, Old Man Tiber, who established a CRT funding it with shares of his family’s private vineyard. He envisioned the vineyard continuing to operate, generating income for both the charity and his beneficiaries. Unfortunately, the receiving charity was a small local food bank, completely unprepared to manage a multi-acre vineyard. They ended up having to sell it quickly at a significant loss, negating much of the intended benefit. This underscores the importance of selecting charities aligned with the assets within the CRT and establishing clear guidelines for acceptable in-kind distributions.
Are there limits to the type of assets a CRT can distribute?
The IRS does place some limitations on the types of assets that can be distributed from a CRT. Distributions of tangible personal property, like artwork or collectibles, are subject to strict rules, especially if the CRT originally received the asset as a donation. These assets may be subject to excise taxes if distributed within two years of the CRT receiving them. Moreover, the IRS will scrutinize any distribution that appears to be a disguised gift to a disqualified person. Approximately 10-15% of CRTs encounter issues with improper distributions, often due to lack of diligent record-keeping or failure to comply with valuation requirements. “It’s not just about the initial funding,” stresses Steve Bliss, “ongoing administration and adherence to IRS guidelines are critical to ensure the CRT continues to function as intended.”
How can a CRT successfully manage in-kind distributions?
Successful in-kind distributions require careful planning and documentation. First, the trust document should clearly define the types of assets that can be distributed in kind and the procedures for determining their value. Second, a qualified appraiser should be engaged to provide an accurate valuation of any non-cash asset. Finally, the charity should be contacted in advance to confirm its willingness to accept the asset. I recall a client, Ms. Eleanor Vance, who established a CRT funded with a portfolio of blue-chip stocks. She specifically requested that a portion of the annual distributions be made in kind, donating shares directly to her favorite university. We worked closely with the university’s development office to coordinate the transfers, ensuring they were properly documented and valued. The result was a win-win: Ms. Vance received a tax deduction for the donation, and the university received a valuable contribution without having to liquidate assets. “Proactive communication and meticulous record-keeping are the hallmarks of a well-administered CRT,” concludes Steve Bliss.
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About Steve Bliss at Wildomar Probate Law:
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Feel free to ask Attorney Steve Bliss about: “Who should I talk to about guardianship for my children?” Or “What is ancillary probate and when does it happen?” or “How do I set up a living trust? and even: “Can bankruptcy stop foreclosure on my home?” or any other related questions that you may have about his estate planning, probate, and banckruptcy law practice.