The charitable remainder trust (CRT) originated in the United States. It has become a popular estate-planning tool, allowing donors to pay themselves a lifetime income, give to charity and minimize their tax burden in one fell swoop. Eventually, the CRT came to Canada. But differences in tax codes between the two countries make it a less powerful tool.
What is a Charitable Remainder Trust and How Does it Work?
A charitable remainder trust is an irrevocable trust that you can establish with cash, securities, or real estate assets. It makes regular payments to one or more income beneficiaries either for life or for a specified period. Upon the death of the income beneficiaries, or once the specified term has ended, the assets in the trust go to one or more registered charities. At that point, the charity can issue a receipt for the value of the donation.
A charitable remainder trust is usually used to maintain a lifetime interest in a set of assets while also making a charitable gift.
How Charitable Remainder Trusts Differ in the U.S. and Canada
In the United States, a charitable remainder trust has powerful tax benefits. It allows donors to:
- Claim an immediate tax deduction for an eventual charitable gift (which isn’t otherwise available for a gift by will).
- Avoid estate taxes.
- Avoid capital gains tax on appreciated assets donated to the trust.
- Defer taxes on growth.
- Continue to receive payments even if it means drawing down original trust assets.
In Canada, they work differently:
- The Canada Revenue Agency (CRA) already offers a large tax incentive for charitable gifts by will, so the upfront deduction is less attractive.
- There are no estate taxes to avoid.
- You’ll owe capital gains taxes on appreciated assets donated to the trust (taxes you’d avoid if you gave the property to a registered charity directly).
- Capital gains generated by the trust are taxable.
- You only receive payments if the trust assets generate returns. No returns, no payment.
Why You Might Elect to Use a CRT
The limitations presented by CRTs in Canada mean they tend to be appropriate in fewer situations than in the U.S. However, there are some instances you might choose one. If, for example, your estate is unlikely to generate much income or capital gains toward the end of your life, then the full tax benefit of a charitable gift made upon death may go unrealized. In a case like that, it may be preferable to use a charitable remainder trust to redeem the tax savings now.
A charitable remainder trust may also be an effective way to leave most of your assets to a charity you’re passionate about while also ensuring that you provide for a spouse or other loved one after your death. You could, for example, establish a charitable remainder trust with the bulk of your assets and name your spouse as the beneficiary. It may give you peace of mind to know that your spouse will receive income from the assets for the remainder of their life and that the remainder has already been irrevocably promised to the charity.
A charitable remainder trust offers broad benefits of privacy and efficiency. CRTs are less transparent than wills, and the remainder gift transfers to the charitable beneficiaries immediately, without first going through probate. If you find those attributes most appealing, you might want to consider a similar structure, such as an alter ego trust, a more popular estate-planning tool in Canada.
An alter ego trust allows you to establish a trust where you are donor, beneficiary, and trustee all at once. Like a CRT, an alter ego trust can pay you income while you’re alive and transfers the remainder to residual beneficiaries. A key difference is that residual beneficiaries of an alter ego trust do not have to be charities. In theory, that could allow you to take more of your assets out of your estate and into a more efficient structure for transferring gifts to heirs.
Whatever your financial situation and estate goals, be sure to consult with a financial professional to make sure you choose the instruments that are right for you.
SOURCES:
https://www.allaboutestates.ca/charitable-remainder-trusts-canada/
https://www.irs.gov/charities-non-profits/charitable-remainder-trust
https://lklaw.ca/blog/alter-ego-trusts-powerful-tool-estate-planning/