How to Set Up a Charitable Remainder Trust

How to Set Up a Charitable Remainder Trust

Charitable donations can be a priority for some families in their estate planning. You can make the most out of your philanthropic desires while benefiting your income taxes through a charitable remainder trust. 

A charitable remainder trust lets you donate your property to a charitable cause while receiving charitable income tax deductions. An experienced financial advisor can help you decide if a charitable remainder trust is a right choice for you.


What is a Charitable Remainder Trust?

A charitable remainder trust, or CRT, disperses tax-exempt income to beneficiaries for many years then donates the trust’s remaining funds to a specified charity. This estate planning tool is an irrevocable trust that permits you to earn income while reducing your present income taxes and estate taxes after your death. 

You can name yourself or anyone else as the beneficiary of this type of trust. As the trustee, you can continue to contribute to the trust that benefits from the trust’s terms. One of this trust’s benefits is not paying taxes on future income it generates.


How a CRT Differs from a Private Trust

The main difference between a CRT and a standard trust is that the charitable trust can last indefinitely. This contrasts with private trusts, which may specify when the trust will terminate. 

A state attorney general or another individual representing the public’s interests acts as administer of a CRT, which differs from private trusts. For private trusts, the beneficiaries or the trustee of a private trust are the administrators.


What are the Benefits of a Charitable Remainder Trust?

A charitable remainder trust reduces income taxes for the trustee and beneficiaries. It allows you to convert appreciated assets into financial instruments that offer lifetime income. If you choose to sell assets that fall under the category of real estate or any other non-inventory asset, you do not have to pay capital gains taxes.

A charitable remainder trust affords you protection against creditors for the assets included in the trust. You also get to earn more income than if you were to sell your assets without the umbrella of the charitable trust.

If you’re looking to leave a legacy of compassion behind when you pass away, assigning a charitable beneficiary can help people in need. For many, the moral stance of helping those in need through their life’s work can overshadow all other benefits.


Setting Up a Charitable Remainder Trust

Start by finding an attorney who is knowledgeable in estate planning and has experience setting up charitable remainder trusts. Your attorney will help you create the CRT.

Do your due diligence by checking that the IRS approves your choice of charity. If the IRS approves, transfer the assets into the trust. At this point, you should have a charity or charities in mind as recipients of your contribution. Name your chosen charity as a Trustee. Then state who the lead beneficiary of the CRT is. This can be you or another person you choose.

If you decide that the beneficiary will receive income from the CRT, state this and the number of years they will receive income payments. When the beneficiary dies or at the end of the predetermined number of years assigned, all assets that remain in the CRT will go to the stated charity.


Variations of CRTs

There are two types of charitable remainder trusts from which to choose.


Charitable Remainder Annuity Trust (CRAT)

A charitable remainder annuity trust is an income plan you can use to transfer cash and securities into a trust. The trustee manages the assets in the CRAT and pays the beneficiary a fixed income as an annuity. 

The value of the annuity paid is a fixed percentage of the trust’s assets as initially valued. Keep in mind that the annuity cannot be less than 5%.


Charitable Remainder Unitrust (CRUT)

The charitable remainder unit trusts provides income to a specified beneficiary during the trustee’s life, with the remainder of the trust going to a charitable cause. CRUTs may be funded with valuable assets such as a house, artwork, or stock and bonds. 

Assets can be added to this trust over time, which differs from CRATs. CRUTs are required to give at least 10% of the trust’s assets to charity.


Are There Any Downsides to a Charitable Remainder Trust?

The valuation of the assets in a CRT needs to be sufficient to support this type of estate planning vehicle. The irrevocable nature of CRTs makes it challenging to remove assets or switch beneficiaries down the road. The principle of trust reduces as income payments increase, which may leave less for your chosen charity.


Get Help Planning Your Estate

When contemplating estate planning, how you choose to deal with your assets is as much an investment as it is about making arrangements for your legacy. Whether you’re looking to have your capital gains tax-deferred or want to safeguard your family financially, Finance is us is here to help. Contact us today for help making informed financial choices on all investment matters, including charitable remainder trusts.


Disclaimer: All content on this site is information of a general nature and does not address the circumstances of any particular entity or individual, nor is the information a substitute for professional financial advice and services. 

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