A CRT usually provides for distribution of a percentage of the trust principal, at least annually, to a person, usually the grantor, for his or her lifetime. The CRT can provide that when the grantor dies, the grantor’s spouse shall become the CRT annuitant for his or her lifetime. When this period ends, the charity receives the remaining CRT assets (the “remainder interest”).
Creating a CRT provides several income tax benefits. For example, the grantor can deduct the remainder interest’s value (the interest passing to the charity) as determined at the CRT’s inception by consulting IRS tables.
An additional benefit is that the CRT is exempt from all income tax. So a grantor owning assets subject to a large capital gain can transfer these assets to the trust, and it can sell them without the grantor or the trust having to pay any tax on the gain. Or a grantor holding highly appreciated assets that aren’t producing much income can contribute them to the CRT and create an income stream and owe tax only as annuity payments are received. It sells them and reinvests the proceeds to service the annuity.
A nondebtor-spouse-created CRT protects assets from a debtor spouse’s creditors. A creditor can’t attach the principal because of the charitable interest. And a debtor spouse’s creditors can’t attach the nondebtor spouse’s annuity payments. If the nondebtor spouse dies first – and the CRT provides that the debtor spouse becomes the annuitant – the debtor spouse’s creditors could attach the annuity when distributed to him or her.