How Does a Charitable Remainder Trust Work?

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What is a Charitable Remainder Trust?

A charitable remainder trust is an estate planning device through which property is placed in a trust for a charitable organization. The person who set up the trust (a grantor or settlor) will receive income payments throughout his or her life, and then, when he or she dies, the charity will receive the property within the trust.

There are two types of charitable remainder trusts: A unitrust and an annuity trust.

  1. Unitrust – Income payments are based on a percentage of the value of the trust’s assets. However, the assets are revalued each year so the amount of the payments fluctuates.
  2. Annuity trust – The rate of income is fixed when the trust was first created, so payments are on a set schedule.

There are significant tax advantages to using a charitable remainder trust. Highly appreciated property, such as real estate or a stock portfolio can be donated to a charity for the life of the grantor. The income from the stock portfolio continues to go to the grantor, which is reported to the IRS as taxable income. The donation, however, is tax-deductible.

If the grantor does not need the income, it can stay in the trust tax-free and be deferred until a later year. This eliminates capital gains taxes on highly appreciated assets, such as stocks. It can also reduce the estate tax your heirs might have to pay after your death by up to 50%.

However, net distributions must amount to at least 5%. This is often used as a retirement plan, since income can be deferred until retirement.

Do I Need an Attorney for my Charitable Giving Matter?

You should always confer with an estate planning lawyer to plan the distribution of your estate. Lawyers understand the tax implications of estate planning, and will guide you through the difficulties associated with drafting wills and trusts. A lawyer will also help explain charitable giving, and how best to draft charitable trusts.

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Last Modified: 10-22-2013 05:04 PM PDT

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