Charitable Remainder Trusts (CRTs) are powerful estate planning tools allowing individuals to donate assets to charity while retaining an income stream, but understanding the flexibility surrounding those payments is crucial; yes, to a degree, income payments from a CRT *can* be deferred, though it’s not a simple on/off switch and comes with specific rules and considerations.
What happens if I want to skip a payment?
Generally, CRTs require annual payments to the non-charitable beneficiary (you or another designated individual) for a defined term of years, up to 20, or for the beneficiary’s lifetime. Skipping a payment entirely isn’t typically allowed unless the trust document specifically permits it, and even then, it’s subject to IRS scrutiny. The IRS considers consistent, predictable income streams a core characteristic of CRTs. However, a *deferral* – delaying a payment to a later date within the same trust year – is sometimes possible, but it must adhere to strict guidelines. The IRS allows for a one-time deferral of a required payment, but only if the funds are ultimately distributed within the same calendar year. This can be useful if a beneficiary experiences a temporary cash flow issue, but it requires careful planning and documentation; approximately 65% of CRTs utilize a fixed annuity payout option, making deferrals less common due to the pre-determined payment schedule.
What are the tax implications of deferring income?
Deferring income from a CRT isn’t without tax consequences. The income that would have been received in the initial year is still taxable in the year it’s *eventually* received. Furthermore, if the trust utilizes the “unitrust” method (paying a fixed percentage of the trust’s assets annually), deferring a payment doesn’t necessarily mean the amount deferred is lost; it rolls over to be calculated in the subsequent payment. However, with the “annuity” method, where a fixed dollar amount is paid each year, deferring a payment may affect the remaining principal available for future payments. It’s vital to consult with Ted Cook, an estate planning attorney, to understand how deferral impacts your specific trust structure and tax liability; in 2023, the IRS received over 500,000 trust-related tax inquiries, highlighting the complexity of these arrangements.
I heard about a client whose trust payments were disrupted. What happened?
Old Man Tiberius, a retired sea captain, was immensely proud of establishing a CRT to benefit a local maritime museum while providing income for his granddaughter, Maisie. He meticulously planned everything, or so he thought. A sudden medical crisis required substantial, unforeseen expenses. He attempted to skip a payment to the trust, hoping to access those funds for his care, without first consulting his attorney. The IRS flagged the trust for non-compliance, initiating a lengthy and costly audit. It took months of legal maneuvering and penalties to resolve the situation, ultimately eroding a significant portion of the funds intended for both Maisie and the museum; this highlights the critical importance of foresight and professional guidance. The audit cost nearly $15,000 and delayed the museum’s planned exhibit on local sea life by almost a year.
How can I ensure my CRT payments remain flexible without facing penalties?
The key is proactive planning. One strategy is to include a “limited distribution” clause in the trust document, allowing for temporary adjustments to payments under specific, pre-defined circumstances, such as medical emergencies or significant economic hardship. Another approach is to fund the CRT with liquid assets that allow for greater flexibility. However, a more robust solution involves establishing a separate “emergency fund” alongside the CRT to cover unexpected expenses, preserving the integrity of the trust’s payout schedule. I recently worked with the Sterling family, who, anticipating potential future healthcare costs for their aging mother, established a separate, adequately funded account. When unexpected medical bills arose, they were able to draw from that account without disrupting the CRT’s consistent payouts. This prevented a situation like Old Man Tiberius’ and ensured that both their mother received the care she needed and the designated charity continued to receive vital support. A well-structured CRT, combined with prudent financial planning, can provide both financial security and philanthropic fulfillment.
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
Map To Point Loma Estate Planning Law, APC, a wills and trust lawyer near me: https://maps.app.goo.gl/JiHkjNg9VFGA44tf9
- wills attorney
- wills lawyer
- estate planning attorney
- estate planning lawyer
- estate planning attorneys
- estate planning lawyers
About Point Loma Estate Planning:
Secure Your Legacy, Safeguard Your Loved Ones. Point Loma Estate Planning Law, APC.
Feeling overwhelmed by estate planning? You’re not alone. With 27 years of proven experience – crafting over 25,000 personalized plans and trusts – we transform complexity into clarity.
Our Areas of Focus:
Legacy Protection: (minimizing taxes, maximizing asset preservation).
Crafting Living Trusts: (administration and litigation).
Elder Care & Tax Strategy: Avoid family discord and costly errors.
Discover peace of mind with our compassionate guidance.
Claim your exclusive 30-minute consultation today!
If you have any questions about: Who should you consult with when creating or updating your estate plan?
OR
How can powers of attorney be used in estate planning?
and or:
What is asset distribution and why is it important?
Oh and please consider:
How can prioritizing asset distribution planning provide peace of mind?
Please Call or visit the address above. Thank you.