A charitable remainder trust can be a powerful estate planning tool. In the right situation, it can provide you with many financial benefits. In this article, we will go over the basics of charitable remainder trusts so you can determine if one is right for you.
A charitable remainder trust is a type of irrevocable trust. It allows you to provide for yourself or a beneficiary and charity. A charitable remainder trust gives you or your beneficiary an income stream and the remaining funds go to a charity. You can fund this trust with cash, publicly traded securities, and real estate. They have both benefits and restrictions, which we will go over later in this article.
How They Work
If you decide to create a charitable remainder trust you will need to decide who will benefit from the income stream. This can be you or another beneficiary. Then you will need to choose the frequency at which the payment will be made. Your options are monthly, quarterly, semi-annually and annually. Additionally, you need to ensure the total payments mad are equal to at least 5% of the trust account value. However, total annual payments cannot be more than 50% of the total account value.
Once the income period is over, you donate the remaining trust assets to a charity or charities of your choice. It is important to note that the charities you choose must have IRS approval for your donation to qualify.
Some additional points you should be aware of include:
- All contributions you make are irrevocable
- The portion of the trust fund you donate to charity is tax-deductible
- You must name a trustee to manage the trust, but you can name yourself as the trustee.
Types of Charitable Remainder Trusts
Charitable remainder trusts come in two types: a charitable remainder annuity trust (CRAT) and a charitable remainder uni-trust (CRUT). You fund a charitable remainder annuity trust with one lump contribution. Then you or your beneficiary receive fixed annuity payments. With these types of CRTs, you can only make one initial contribution, no subsequent contributions are permitted. The second type, a charitable remainder uni-trust, functions differently. CRUTs allow you to make multiple sets of contributions. The income stream you receive is a set percentage. It is based on the assets in your trust account. You must recalculate this percentage each year.
Benefits and Drawbacks
As with any financial decision, a charitable remainder trust has both benefits and drawbacks. The benefits of a charitable remainder trust include:
- The ability to create a reliable income stream for yourself or a beneficiary
- Utilizing your assets for a charitable purpose
- Tax deductions
- Creditor protection for the remainder of the trust
Some of the drawbacks include:
- Irrevocability-You cannot change trust provisions to meet changing circumstances
CRTs and Taxes
Any contributions that your trust makes to charity are tax-deductible. You can spread this deduction over five tax years. Verses just claiming the deduction in the year you made it. Additionally, the assets you place into a charitable remainder trust do not count toward your estate value, which can help to minimize or eliminate the estate tax. CRTs can also help you to avoid or minimize capital gains tax.
Charitable Remainder Trusts and You
After going over the benefits and drawbacks of a charitable remainder trust you will need to determine whether one makes sense for you and your financial situation.
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