Charitable remainder trusts (CRTs) are known as irrevocable trusts that allow you to donate assets to a charity. This means you cannot modify or revoke the trust. You are permitted to draw annual income for life or a specific period through them. In a charitable remainder trust:
- A donor initially transfers some amount of property, cash, or other assets into an irrevocable trust;
- The trust’s basis in the transferred assets is a carryover basis;
- The trust provides income to at least 1 living beneficiary;
- There is a specified time frame for the payments;
- Once the payment term ends, the remainder of the trust passes to 1 or more qualified U.S. charitable organizations; and
- The remainder donated to charity must be at least 10% of the initial net fair market value of all property held in the trust.
The assets cannot be removed after being placed inside this irrevocable trust. Individuals living in a society create the charitable remainder trust for many reasons.
What Are the Benefits of Forming a Charitable Remainder Trust?
The charitable remainder trust offers many benefits, and below are some examples of them:
- Assist in planning for a charitable cause you value;
- Provide a predictable income for life or over a specific period;
- Receive more income over your lifetime than if you had sold the asset yourself;
- Allow you to defer income taxes on the sale of assets transferred to the trust;
- Provide more funds to your heirs by using a life insurance trust to replace the gifted asset;
- Be shielded from creditors if you gift the asset.
What Are the Advantages in Terms of Taxes?
There are several tax benefits for having a charitable remainder trust. For those with significantly long-term appreciated assets, including non-income-producing property, a CRT allows you to contribute that property to the trust, and when the trust sells, it is exempt from tax.
By donating the assets to the CRT, you are essentially preserving the full fair market value of the assets instead of reducing it by large capital gains taxes. This, as a result, creates more money for the income and charitable beneficiaries.
The CRT’s investment income is exempt from tax. This makes the CRT a good move for asset diversification. You can donate low-basis assets to the trust so that when sold, no income tax is generated to you and you eliminate the capital gains tax as stated earlier
However, the named income beneficiary will pay income tax on the income stream obtained. Furthermore, through the income tax deductions with a CRT, you have the possibility of taking a partial income tax charitable deduction when you fund the trust.
Additionally, as mentioned above, the trustor not only receives a partial tax deduction for their donation to the trust; they also can see a reduction in estate taxes. There is also the benefit of having a regular income stream from a charitable remainder trust while simultaneously donating money to charity from the trust. This can ensure that the money you choose for a charity is helping a cause important to you.
After death, the trust shields the money from creditors or greedy family members, passing it on instead to charity as directed by the trustee. The advantages of having a charitable remainder trust provide a viable incentive for those looking to make use of their funds.
What Assets May Be Donated to a Charitable Remainder Trust?
You can utilize several types of assets to fund a charitable remainder trust; below is a list of some examples:
- Cash
- Publicly traded securities
- Some variations of closely held stock
- Real estate properties
- Other particular complex assets
What Are the Different Types of Charitable Remainder Trusts?
In general, there are two main types of charitable remainder trusts, they are contrasted by whether or not they pay a fixed or fluctuating annual amount to the non-charitable beneficiaries.
The first type is the charitable remainder annuity trust (CRAT), which distributes a fixed annuity each year to their non-charitable beneficiaries. This amount stays the same and must be at least 5% but no more than 50% of the assets in the trust. No other additional contributions are permitted for this type of trust.
The second type is the charitable remainder unitrusts (CRUT). These types of trusts divide a fixed percentage depending on the balance of the trust assets, which are reviewed annually. The annual amount will alternate, but, as with CRATs, it must be at least 5% but no more than 50% of the assets in the trust. Unlike a CRAT, though, a CRUT does permit additional contributions.
What Is the Purpose of a Charitable Remainder Trust?
One of the main reasons for setting up a charitable remainder trust is to simultaneously contribute money to charity while providing a steady income stream for the trustee or one or more designated non-charitable beneficiaries.
The income has a time frame after which the remaining funds in the trust are donated to one or more designated charitable beneficiaries.
What Are Illegal Uses of Charitable Remainder Trusts?
Although there are many viable options for utilizing a charitable remainder trust, there are some uses that are against the law. Charitable remainder trusts cannot be misused to evade taxes or illegally benefit their beneficiaries. The following are some examples of illegal uses when it comes to charitable remainder trusts:
- Inflating the basis of an asset regarding its market value and illegally minimizing or eliminating capital gains or income;
- Failure to record the sale of any assets of the trust;
- Mischaracterize distributions of ordinary or capital gain income as distributions of corpus;
- Grant the non-charitable beneficiaries additional payment beyond the prescribed annual income payments, also referred to as self-dealing;
- Transfer the charitable remainder interest of the trust to an organization that does not qualify for a tax-exempt organization;
- Make an upfront cash payment to a charitable beneficiary instead of the remainder interest.
Furthermore, according to the law, the charitable trust donors and beneficiaries cannot:
- Make personal expenses with trust funds;
- Borrow from the trust and modify the character of the payments;
- Utilize loans and other financial schemes to hide capital gains or income in the trust.
Typically, the term of a charitable remainder trust can be for up to 20 years or the lifetime of one or more non-charitable beneficiaries.
Who Can Receive Income from a Charitable Remainder Trust?
According to Estate Planning, trust income that is taxable in the year it is received can be paid to you for your lifetime. You and your spouse can receive it as long as either of you lives. If you qualify and meet certain requirements, your income can also be paid to your children for their lifetimes or to any other person or entity you desire.
Lastly, there are other gift and estate tax considerations. In terms of timeline, it can last up to 20 years or another set number specified in the trust agreement.
When Do I Need to Contact a Lawyer?
Setting up a charitable remainder trust has its benefits. You can research them further through a lawyer to understand them and determine whether or not they are a viable legal option for you to secure your funds.
Reach out to a local trust lawyer to assist you and figure out a plan for you to move forward with the best pathway for creating a charitable remainder trust. LegalMatch can put you in touch with a trust lawyer who can help you with your needs.
