Charitable Remainder Trusts
Broadly defined, a Charitable Remainder Trust (CRT) is any Trust, living (inter vivos) or testamentary, where all of a portion of the remaining Trust assets are distributed to a charity at the termination of the Trust.
It was not until the early 1990’s that the CRT became known widely in charitable circles in Canada. Donors in the United States, however, have been using it successfully for years. Its use is so commonplace that it is the second-most popular form of planned giving vehicle, after the Bequest.
Simply, the Trust is a legal arrangement in which one person (the “Settlor”) transfers irrevocably legal title to a “Trustee” to manage property for the benefit of another person or institution (the “Beneficiary”). The Trustee is a person or a Trust company that manages Trust property according to the instructions in the Trust agreement and the laws governing Trustees. A “Trustor” is a person who creates a Trust either by a Will or by another Trust instrument. In the case of the “Charitable Remainder Trust”, the Trustor is a Donor. A formal Trust will include a Trust Agreement which gives instruction to the Trustee as to how the property is to be used for the benefit of the Beneficiary (ies).
More particularly, a CRT is a planned gift whereby a donor makes a gift (usually an irrevocable one) to the Canadian Medical Foundation through a Trust agreement. The Donor (Settlor) transfers property to a Trustee who holds and manages it. If the property is income-producing, the net income will be paid to the donor and/or to other named Beneficiary (ies). When the Trust terminates, (either at the death of the Beneficiary (ies) or after a term of years), the Trust remainder is distributed to beneficiaries. If the Trust is irrevocable, the donor is immediately (at the time of the establishment of the Trust) entitled to an official tax receipt for the present market value of the donated residual interest.
The Charitable Remainder Trust in Canada
A Canadian CRT can be established in one of two ways: as a living (or, inter vivos) Trust established during the life of the donor, or as a testamentary Trust established from a donor’s Will. CRT’s are unique in a number of ways:
- The Donor establishes an irrevocable gift to charity in return for a discounted tax receipt as well as a fully taxable tax flow (interest income for life);
- The charity receives an irrevocable gift and upon the termination of the Trust, will receive the remainder;
- Donations cannot be contested by Beneficiaries of the estate;
- Probate and settlement fees do not apply to the gift.
These gifts are typically made by persons over the age of 60 who want to make a future gift and obtain present tax relief but also want to preserve investment income for themselves and/or a survivor.
In a living Trust, the donor funds the Trust by irrevocably transferring ownership of their assets (a sum of money, securities, personal or real property) to a Trustee, who may be the Canadian Medical Foundation, another individual or a financial institution such as a Trust company. Then a Trust document is created setting out the rules of the Trust and naming the Canadian Medical Foundation as residual Beneficiary.
This document is signed by the Donor and the Trustee. The present value of the residual interest is calculated and the Canadian Medical Foundation gives the donor an income tax receipt for the calculated amount. Income is paid by the Trustee to the Beneficiary (usually the Donor) for life or for a term of years, as outlined in the Trust terms. Upon the termination of the Trust, the Trustee pays out the remaining Trust assets to the Canadian Medical Foundation to support charitable programs such as financial aid for deserving medical students or physician health and well-being programs.
For a testamentary Trust, the Donor drafts a new Will or revises an existing Will in which the terms of the testamentary CRT are set out. Here, the Will is drafted in the usual way, and provisions for the Trust are contained in specific clauses. Although in this case the Trustee is not a signatory to the Will, the Trustee must nevertheless agree to act. Usually, the terms provide support to a loved one or other family member for as long as they live, with the assets coming to the charity following the death(s) of the Beneficiary (ies). The testamentary CRT is irrevocable and will only be established upon the death of the donor.
Most Likely Potential Donors to Use the CRT
The CRT is a vehicle primarily of interest to upper-income donors 60 years or older. The Donor has extensive holdings, is in a high marginal tax bracket, and has philanthropic intentions and ability to gift some assets.
The benefits of the living or inter vivos CRT are many:
- The satisfaction of establishing a substantial gift;
- The provision of lifetime income to the donor;
- An immediate tax receipt;
- Donor is free from investment worries;
- An estate planning tool which avoids probate and is non-contestable; and
- Provides privacy for the donor.
The benefits of the testamentary CRT include:
- Provision of lifetime support to a loved one;
- Provision of a tax receipt to the estate;
- The Trust is revocable during life and takes effect on the death of the Testator.
Example – Donation Receipt
Dr. Prospect Donor transfers $100,000 cash into a CRT and names the Canadian Medical Foundation as the remainder Beneficiary. The donor is 75 years of age and the discount rate has been determined to be 5% (based on the long-term bond rate).
$100,000 = $62,601.00
Therefore, Dr. Donor receives a charitable tax receipt valued at $62,601.00