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Using CRTs to Plan For Retirement
Q: This all sounds good, but right now I don't want or need any additional income that would be subject to high income tax rates. While I could use additional income when I retire in 15 years, I really need more tax deductions right now. What can a CRT do for me?
A: Many successful people find themselves in this position during the prime of their careers. They have exhausted all traditional tax-advantaged retirement savings options but are not sure that what they have set aside will be enough. Some unique features of CRUTs make them particularly useful for retirement planning purposes.
You can add provisions to CRUTs so that the annual distribution will be made only to the extent the trust has income. It's important to note that income, as defined by state law, generally means elements taxed as ordinary income, such as dividends, interest and net rents, or as tax-exempt income. This can include capital gains if the trust so specifies and state law permits. Planned properly, a CRUT can be set up and invested so as to produce little or no current income. This allows the trust to grow much more rapidly, increasing the distributions you will receive when the trust does start generating income. When income is needed in the future, the trust can change investments and sell appreciated assets to create capital gains that can be distributed to you.
You may also create a trust that starts out as an income-only CRUT and then at some point in the future converts, or flips, to a trust that pays out the stated unitrust percentage, regardless of the actual investment results of the trust. A flip CRUT is an excellent way to increase your retirement income. A flip CRUT allows the trustee to invest in a portfolio that is likely to generate a higher total return over the long run than one that is invested for high current income. |
