Financial Advisor in Raleigh NC: Charitable Remainder Trust

The charitable remainder trust (CRT) is a popular retirement- and estate-planning tool. It can be a convenient way to create a stream of lifetime income for yourself and others or donate to a charity while minimizing and deferring taxes. But there are many choices to make when establishing a CRT and, in some cases, these tools may not be right for everyone.

What is a Charitable Remainder Trust and How Does it Work?

A charitable remainder trust is a form of trust created with the intention of providing financial benefit to one or more beneficiaries. This type of trust is referred to as a “split interest” trust because the income beneficiary is entitled to receive a fixed payment from the trust, usually on a monthly, quarterly, semiannual, or annual basis.

The income beneficiary is entitled to a fixed payment from the trust for either life or for a specified period of up to 20 years. The remaining assets in the trust, after payments to the income beneficiaries are made, are then distributed to the designated charity or charities when the trust terminates.

Upon the death of the income beneficiaries, or once the specified term has ended, whatever is left in the trust goes to one or more qualified U.S. charities. That remainder must be worth at least 10% of the initial value of the trust assets.

There are two types of CRTs:

• Charitable Remainder Annuity Trusts (CRATs) make payments in a fixed dollar amount (between 5% and 50% of the initial value of trust assets annually). You may not make additional contributions after the trust is established.

• Charitable Remainder Unitrusts (CRUTs) make payments based on a percentage of the current value of the trust assets (between 5% and 50% annually). You may continue to contribute to the trust after it’s established.

You establish a charitable remainder trust by donating assets. These can take various forms, such as cash, stocks, real estate, and private business interest. Once it’s funded, a trustee manages the trust.

Charitable remainder trusts are often established by a living donor who is also the income beneficiary, but they can also be established upon the donor’s death as a way to provide income for one or more heirs. 

A charitable remainder trust is irrevocable, which means that once you place an asset in the trust, you can’t change your mind and take it out.

The Advantages of Charitable Remainder Trusts

Setting up a Charitable Remainder Trust (CRT) can provide tax benefits to the individual or organization that initiates it. The assets transferred to the CRT are partially deductible from the taxable income of the individual or organization based on the estimated amount of the eventual donation to charity and other relevant factors. Furthermore, any profits or gains earned on the investments within the CRT are tax-deferred, allowing for maximum growth of the assets.

Appreciated assets donated to a Charitable Remainder Trust (CRT) can be sold by the trust without incurring capital gains taxes. This is beneficial to the donor, since capital gains taxes would otherwise need to be paid when the asset is sold. However, distributions to beneficiaries from the trust, such as the donor or other named individuals, are generally taxable. Beneficiaries may need to pay taxes such as income tax or capital gains tax on the distributions they receive.

A CRT can also simplify estate planning. As an irrevocable trust, the CRT is not considered part of the donor’s estate. That means, for example, the remainder of the trust transfers immediately to the charitable beneficiaries upon death without getting stuck in probate.

The Disadvantages of Charitable Remainder Trusts

Charitable remainder trusts also come with some pitfalls. They can be complicated to set up and administer, and if you run afoul of certain requirements, you could retroactively lose a CRT’s tax benefits.

If you are not careful in managing the income from a Charitable Remainder Trust (CRT), you could end up drawing too much in income and leaving too little for the trust’s designated charitable beneficiaries. In this case, your estate may be liable for additional income, gift, and estate taxes.

Furthermore, certain types of assets, such as S corporation stock and mortgaged real estate, are not eligible for inclusion in a CRT. Therefore, it is important to review your estate plan and carefully consider the types of assets that you wish to include in the trust to ensure that you are in compliance with all applicable regulations.

Bottom Line

The CRT is a good option if you want an immediate charitable deduction, but also have a need for an income stream to yourself or another person. It is also a good option if you want to establish one by will to provide for heirs, with the remainder going to charities of your choosing.

Talk to your financial advisor or financial planner to determine if a CRT is the right choice for you and how best to take advantage of their income, philanthropic, and tax-management benefits.

SOURCES:

https://www.irs.gov/charities-non-profits/charitable-remainder-trust

https://www.fidelitycharitable.org/guidance/philanthropy/charitable-remainder-trusts.html

https://www.investopedia.com/terms/c/charitableremaindertrust.asp

https://www.cl-law.com/uploads/1461863023.pdf

https://www.barrons.com/articles/the-charms-and-dangers-of-the-charitable-remainder-trust-1506133624

https://www.fidelitycharitable.org/guidance/philanthropy/charitable-remainder-trusts.html

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