When a donor funds a charitable remainder trust (CRT), the assets are irrevocably transferred to the trust. The trust makes distributions to one or more non-charitable beneficiaries, usually including the donor, for life and/or a term of years (not to exceed 20 years), after which the remainder passes to charity. The donor receives a charitable deduction at the time of the gift to the CRT, which is the present value of the remainder interest expected to pass to charity. The remainder interest is calculated based on the life expectancy of the beneficiaries, the term of years, or a combination of the two. For CRTs funded after July 28, 1997, the remainder value must be at least 10% of the initial gift value.
Early Termination
A CRT is irrevocable, however, the trust can be terminated early, with the remainder passing then to charity if all the parties (trustee, beneficiary, and charity) agree. The trust termination must comply with the terms of the trust and applicable state law. In some states, the trust may require court-approved trust modification. The termination cannot involve self-dealing through prohibited financial transactions between any disqualified persons which include the trustee, beneficiary, and charity.
The donor will receive a charitable deduction for the value of the donor’s remaining life income interest. The remaining life interest for a charitable remainder unitrust (CRUT) is computed from the projected future income stream according to the current market value of the gift. For a charitable remainder annuity trust (CRAT), the remaining life interest is computed from the annual payout amount. These values are discounted to present value using the current IRS discount rate. A physician's medical verification letter to confirm the beneficiary's life expectancy is required for a voluntary termination of a charitable remainder trust.
Fees typically associated with a trust termination include attorney fees to draft the termination documents and retitle assets; court fees if a judicial modification is required for the early termination; bank fees for transferring assets and closing the trust account; trustee fees; and accounting fees.
Charitable Remainder Trust Early Termination Checklist
The following checklist may be helpful for conversations with a donor inquiring about terminating a CRT early. As always, the donor should consult with legal and tax advisors regarding the trust termination.
Charitable Remainder Trust - Early Termination Checklist
☐ Confirm all parties agree
Confirm the trustee, beneficiary, and charity consent.
☐ Follow trust terms and state law
Confirm the trust instrument permits early termination; a court proceeding may be required to modify or terminate the trust under state law.
☐ Avoid self-dealing
Prevent financial dealings with disqualified persons under IRC §4941.
☐ Obtain physician's medical verification letter
Confirm the beneficiary has a normal life expectancy and does not suffer from any known medical condition that would shorten their lifespan, as required by the IRS.
☐ Obtain qualified appraisal (if required)
Obtain an independent qualified appraisal of trust assets valued for more than $5,000 if required for Form 8283 to establish current fair market value. Publicly traded securities, even if valued for more than $5,000, do not require an appraisal.
☐ Complete Form 8283 (if applicable)
File Form 8283 if the value of the income interest relinquished - the resulting charitable deduction - exceeds $5,000.
☐ Calculate charitable deduction
Calculate the present value of the income interest relinquished to determine the resulting charitable deduction.
☐ Draft termination documents
Retain attorney to draft termination or assignment agreement.
☐ Retitle assets
Transfer the trust assets to charity.
☐ Prepare trust tax returns for the final tax year
Retain accountant to prepare the trust tax returns for the final short tax year.
