Charitable Remainder Trust

A Charitable Remainder Trust is a tax-exempt irrevocable trust created to comply with federal tax laws, where you transfer assets into the trust and may receive income from the trust for the rest of your life or for a fixed term not to exceed 20 years. Then upon the expiration of that trust, donate the remaining trust assets to a worthy cause.

A Charitable Remainder Trust is an excellent way to defer or eliminate capital gains taxes on illiquid assets, receive steady income that may increase over time, and leave a lasting legacy in the form of a gift to a charity that you want to support. Contributing highly appreciated assets to a Charitable Remainder Trust can be much more advantageous to you than an outright taxable sale.

How Charitable Remainder Trusts Work?

With a Charitable Remainder Trust, you place a valuable or appreciated asset into the trust. The asset then generates income for you and generally your spouse. This income can be paid over your life, your spouse’s life, and even your children and grandchildren's lives. Then upon your passing, and potentially the life of a loved one, the remaining assets are distributed to a charity of your choosing.

The Two Types of Charitable Remainder Trusts

The amount of income paid out every year by the Charitable Remainder Trust can be a fixed sum or a percentage of the trust earnings. A Charitable Remainder Trust that pays out a fixed sum of income every year is called a Charitable Remainder Annuity Trust (CRAT). A Charitable Remainder Trust, which pays out a percentage of the trust’s earnings every year is called a Charitable Remainder Unitrust (CRUT).

Another difference between a CRAT and a CRUT is that a CRAT does not allow additional contributions to be made to the trust, while a CRUT does. But, in either case, the minimum amount distributed by the trust must be more than 5% and less than 50% of the Fair market value of the trust assets.

Benefits of Charitable Remainder Trusts

  • A Charitable Remainder Trust allows you to enjoy income, avoid taxes, and donate to your favorite charity.
  • Everything you put into a Charitable Remainder Trust is considered an irrevocable charitable gift. This is important because it means that you get an immediate income tax deduction at the time you make the gift.
  • Any appreciated assets you put into a Charitable Remainder Trust bypass all capital gains taxes when you transfer them into the trust before they are sold.
  • Any assets you put into the Charitable Remainder Trust are eliminated from your taxable estate, so they are not counted towards your estate taxes when you pass away.

Drawbacks of Charitable Remainder Trusts

  • There is some administration required for a Charitable Remainder Trust. You are required to have a trustee to manage the trust. This trustee can be you, an individual you appoint, or a financial institution. If you choose a financial institution, you will need to consider the cost of their services before you hire them.
  • Generally, a Charitable Remainder Trust is exempt from income tax. However, if the trust has business income, which is not related to its charitable purpose, such as income derived from a business or trade or from mortgaged real estate, that income will be subject to 100% excise tax.
  • A Charitable Remainder Trust is an irrevocable trust. This means that the trust can't be changed or revoked once it has been created.

What Assets Can be placed in a Charitable Remainder Trust?

With the assistance of a qualified estate planning attorney, you can create a Charitable Remainder Trust, then fund it with almost any type of asset, including:

  • Cash;
  • Stocks, bonds, CDs, and other securities;
  • Real or personal property;
  • Artwork;
  • Insurance policies;
  • IRAs;
  • etc.

Should You Create a Charitable Remainder Trust?

Charitable Remainder Trusts are fairly complex estate planning tools, primarily used for tax planning and to provide lifetime income. Creating a Charitable Remainder Trusts can be extremely beneficial to you in the right situations.

A Charitable Remainder Trust is a great option if you have an asset that, if sold, would create a large tax penalty. Using a Charitable Remainder Trust can result in you benefiting from the asset without the burden of the tax liability.

For individuals looking to make philanthropic donations. A Charitable Remainder Trust provides an opportunity to receive yearly income from the trust, and upon the expiration of the trust, donate the remaining trust assets to a worthy cause.

For more information about Charitable Remainder Trusts, get independent advice from an experienced estate planning attorney who can also help you determine if a Charitable Remainder Trust is a good fit for you.