For more than 25 years, countless families have been using Charitable Remainder Trusts to generate incomes, spend less on taxes, and give to charities. A Charitable Remainder Trust is a tax-exempt irrevocable trust that cannot be altered or revoked after it is created. After a Charitable Remainder Trust is created and funded, the trust will disperse income to the beneficiary for a specified period of time, with everything remaining when this period expires going to a charity specified in the trust. When the remaining assets of the trust go to the charity, no capital gains tax or any other tax will need to be paid by the beneficiary or the person who established the trust.
Charitable Remainder Trusts enable people to achieve their future philanthropic goals while still generating current income. In addition to the charitable and tax management benefits, Charitable Remainder Trusts can offer benefits for retirement and estate planning. There are two types of Charitable Remainder Trusts, with each offering similar benefits, but generating income in different ways:
Contributions to both CRATs and CRUTs are made through the irrevocable transfer of property or cash to the trust. Both types require a mandatory distribution of part of the income or principal to either a beneficiary or the donor. After completion of a specific period, which may be for the life of the beneficiary, the remaining amount gets distributed to one or more charities.
To be eligible for a partial tax deduction, a CRT can be funded with any asset that has experienced a capital gain including stocks, cash, non-publicly traded assets like private business interests, private company stock, or real estate. The tax deduction that will be available to the person who created the trust is based on many factors with the most important being the type of trust, the term of the trust, the projected income payments, and IRS interest rates that assume a certain rate of growth of trust assets.
Depending on the how the trust has been set-up, the beneficiaries will receive an income distribution semi-annually, annually, quarterly, or yearly. The total annual amount of income that the trust may distribute must be between 5% and 50% of assets owned by the trust.
Any assets remaining in the trust after the specified period has passed or the death of the last beneficiary will be distributed tax free to the charitable beneficiaries identified in the trust. The charities can be private foundations or public charities. Depending on the trust documents, the trustee might have the power to change the beneficiary prior to the final distribution from the trust is made.
Any or all of the following assets may be donated to a CRT:
You can be the trustee of your CRT. However, you must make sure that you properly administered the CRT or else you might, in some cases, lose the tax advantages or be penalized.
Some people also opt for corporate trustees when the CRT will require a professional who is experienced handling accounting, government reporting, and managing investments. Some charities will accept being appointed as the trustee if it is in their best interest to do so. It is always a good idea to discuss different alternatives and consider their past investment records, experience with trusts, and services they offer. It should always be in your mind that you will depend on the trustee to manage your trust and distribute income to you.
Yes, you will have control over the trustee for as long as you live. The trustee and not the charity are responsible for controlling the assets in the trust. Your trustee is required to follow the instructions laid down by you in the trust documents. You can always retain the right to change the trustee if you are dissatisfied with the trustee's performance of the required duties. You also have the option to change the charity without losing any tax advantages.
A Charitable Remainder Trust may be a great choice for you if you have highly appreciated assets, want to generate a stream of current income, and want to, eventually, make a significant donation to charity. While there are many benefits to a CRT, many people will establish a CRT only for a portion of their assets so that the remainder of their assets can pass to loved ones instead of a charity. For a more detailed explanation of both the advantages and disadvantages of a charitable remainder trust and to find out if a charitable remainder trust can help you achieve your estate planning goals, please set up a time to speak with our experienced Colorado estate planning attorneys through the contact link on our website.