Yes, you can absolutely include a charity from a donor-advised fund (DAF) network as a beneficiary of your Charitable Remainder Trust (CRT), although it requires careful planning and understanding of the rules governing both CRTs and DAFs.
What are the benefits of using a CRT?
A Charitable Remainder Trust allows you to donate assets, like stocks, bonds, or real estate, to an irrevocable trust and receive an income stream for a specified period or for life. This strategy provides several benefits, including potential tax savings, avoidance of capital gains taxes on the donated assets, and supporting a charity you care about. According to recent data, approximately $38.4 billion was contributed to CRTs in 2022, highlighting their continued popularity as estate planning tools. CRTs can be structured as either Charitable Remainder Annuity Trusts (CRATs), which provide a fixed income, or Charitable Remainder Unitrusts (CRUTs), which provide a variable income based on the trust’s assets.
Is it complicated to name a DAF as a beneficiary?
Naming a DAF as a beneficiary isn’t inherently prohibited, but the IRS has specific rules to prevent abuse. A key concern is ensuring the DAF isn’t simply used as a conduit to receive funds and then distribute them back to the donor or their family – this is considered a prohibited transaction. The IRS scrutinizes these arrangements to ensure genuine charitable intent. A DAF can serve as the remainder beneficiary, meaning it receives whatever assets are left in the CRT after the income stream ends. However, the DAF must be a qualifying charity under section 501(c)(3) of the Internal Revenue Code.
What happened with the Millers and their poorly structured CRT?
I once worked with a couple, the Millers, who attempted to establish a CRT naming a DAF as the beneficiary without proper planning. They intended to receive income from the trust for 10 years, and then the remaining assets would go to a DAF supporting their local animal shelter. However, their trust document was vaguely worded, and the DAF had a provision allowing for advisory privileges to the donor’s family. The IRS flagged this as a potential prohibited transaction, arguing the family’s influence over the DAF effectively meant they were controlling the charitable distribution. This caused significant delays and required costly legal intervention to restructure the trust and satisfy the IRS requirements.
How did the Johnsons get it right with their CRT?
In contrast, the Johnsons came to me wanting to establish a CRT with a CRUT structure. They desired a variable income stream for their retirement and wanted the remainder to benefit a DAF dedicated to medical research. We meticulously crafted the trust document, ensuring it strictly adhered to IRS guidelines. Specifically, we included a clause stating that no individuals associated with the Johnsons could have any advisory or discretionary control over the DAF’s distributions. We also confirmed the DAF’s policies allowed for distributions to various charities, not just those suggested by the donor. The IRS approved the CRT without issue, allowing the Johnsons to achieve their financial and philanthropic goals. They were thrilled to know they had structured their plan effectively and were confident that their wishes would be honored. “It’s such a relief knowing we’ve done this the right way,” Mrs. Johnson told me.
What are the key considerations when planning this arrangement?
When naming a DAF as a beneficiary of a CRT, several crucial considerations are paramount. First, ensure the DAF is a publicly supported 501(c)(3) organization. Second, the trust document must clearly state that the DAF will have complete control over the distribution of the remaining assets. The donor or their family shouldn’t retain any advisory privileges or have the ability to influence the DAF’s decisions. Finally, it’s crucial to work with an experienced estate planning attorney, like myself, who understands the complexities of both CRTs and DAFs to ensure your plan complies with all IRS regulations. Failing to do so can result in penalties, disqualification of the trust, and unintended consequences for your charitable goals.
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