The question of whether a Charitable Remainder Trust (CRT) can be established using a donor-advised fund (DAF) as an intermediary is complex, and the short answer is generally no, not directly, but there are strategic ways to achieve similar charitable goals. CRTs require a trustee to manage the assets, make distributions to non-charitable beneficiaries for a specified period, and ultimately distribute the remainder to a designated charity. DAFs, while charitable giving vehicles, are not designed to act as trustees or receive the remainder interest of a CRT, as they are primarily designed for immediate grant-making rather than long-term trust administration. A direct transfer of assets to a DAF to *create* a CRT isn’t permissible under current IRS regulations governing both vehicles, which are distinct in purpose and operation. Roughly 65% of donors over age 70 utilize some form of planned giving, highlighting the importance of understanding these vehicles and their limitations.
What are the benefits of a Charitable Remainder Trust?
A CRT offers a unique blend of income for the donor (or other beneficiaries) and a future charitable gift. Donors transfer assets to the trust, receive an income stream for a set period (or for life), and ultimately the remaining assets go to the designated charity. This structure provides an immediate income tax deduction based on the present value of the remainder interest—the portion expected to go to charity. For example, a donor transferring $1 million in appreciated stock might receive a significant deduction, while also avoiding capital gains taxes on the stock transfer. However, establishing and maintaining a CRT involves legal and administrative costs, and the income stream is fixed, potentially offering limited flexibility in a changing economic environment. It’s also vital to remember that CRTs are irrevocable, meaning the terms can’t be easily altered after establishment.
How do Donor-Advised Funds work as charitable giving tools?
Donor-Advised Funds are essentially charitable investment accounts that allow donors to make a contribution, receive an immediate tax deduction, and then recommend grants to qualified charities over time. They are often simpler and less expensive to administer than CRTs, making them popular for ongoing charitable giving. Currently, over $160 billion is held in DAFs across the United States, indicating their growing prominence in the philanthropic landscape. Donors maintain advisory privileges over the funds, but legal control rests with the sponsoring organization (typically a public charity). While DAFs can’t act as CRT trustees, they can be *funded* with assets from a CRT after the income term ends, effectively completing the charitable giving cycle.
What happened when Mrs. Gable tried to directly fund a DAF as a CRT?
Old Man Gable was a rancher who had dedicated his life to preserving the land. When he came to Ted Cook, he’d already begun the process of establishing a CRT with the intention of directly funding it with a Donor Advised Fund, envisioning a simple transfer. He’d been advised by a well-meaning, but misinformed, financial advisor. When Ted reviewed the proposed documents, he immediately identified the issue. The DAF’s terms explicitly prohibited its use as a trust intermediary and the IRS would certainly reject the structure. Mrs. Gable was initially frustrated, having already invested time and energy, but Ted explained the limitations and proposed a plan to restructure the plan. He detailed how the DAF could receive the remaining assets *after* the CRT’s income term was complete, aligning with IRS regulations. “Sometimes,” Ted explained, “the most important part of estate planning isn’t just maximizing benefits, but ensuring compliance to avoid future complications.”
How did Mr. Abernathy’s plan finally work using both a CRT and DAF?
Mr. Abernathy, a retired software engineer, had a substantial portfolio of appreciated stock and a desire to provide for his grandchildren while also supporting his favorite environmental charity. Working with Ted Cook, they established a CRT with a 10-year income term, benefiting his grandchildren. At the end of the ten years, the remaining assets were then directed to a DAF he’d previously established. From the DAF, he then made annual grants to the environmental charity. This phased approach allowed him to achieve his goals without running afoul of IRS regulations. “It’s like a relay race,” Ted explained. “The CRT runs the first leg, providing income, and then hands off to the DAF for the final charitable sprint.” This multi-faceted approach demonstrates that while a direct linkage isn’t possible, strategic planning can effectively utilize both CRTs and DAFs to accomplish complex estate and charitable objectives, creating a lasting legacy and fulfilling the donor’s wishes.
Who Is Ted Cook at Point Loma Estate Planning Law, APC.:
Point Loma Estate Planning Law, APC.2305 Historic Decatur Rd Suite 100, San Diego CA. 92106
(619) 550-7437
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