What Is A Charitable Remainder Trust
A charitable remainder trust (CRT) is an irrevocable trust that provides income to one or more non-charitable beneficiaries for some time, after which charities receives the assets.
Charitable remainder trust can attract donors because it offers potential tax benefits. For example, when the property is transferred into a CRT, the donor may be able to take an immediate income tax deduction for the current value of the future charitable gift.
Two Types Of Charitable Remainder Trust
Individuals who want to donate a large sum of money to charity but want to receive some income from the donation first often use charitable remainder trusts. The income from a charitable remainder trust can be in the form of regular payments (annuity) or variable payments (unitrust).
Charitable Remainder Annuity Trust (CRAT)
A CRAT is an irrevocable trust that pays a fixed annuity to one or more beneficiaries for a term of years, after which the remaining assets in the trust are distributed to a charity of the grantor’s choice. The key benefits of a CRAT are that it can provide income for the beneficiaries while also offering tax advantages and supporting a worthy cause.
A CRAT pays the same amount to its non-charitable beneficiaries annually, regardless of its profitability. The grantor first transfers assets into the trust to set up a CRAT. The trustee then invests the assets and uses them to pay out the specified annuity each year. When the term of the trust expires, the remaining assets are given to the charity named by the grantor.
Charitable Remainder Unitrust (CRUT)
The payments from CRUT are calculated using a fixed percentage of the trust’s assets, which are revalued yearly. After your death, the trust’s remaining assets will be distributed to the charity you have named as the beneficiary. Since the trust’s assets are revalued each year, the payments you receive can increase if your investments perform well.
How Does A Charitable Remainder Trust Work?
A charitable remainder trust is a trust that allows you to donate property or assets to a charity while still receiving income from the trust for some time. The charity then becomes the beneficiary of the trust, and you accept payments from the trust each year for the rest of your life. When you pass away, the properties you placed under this type of trust pass to the charity of your choice.
One benefit of a charitable remainder trust is that you can receive a tax deduction for the value of the assets donated to the trust. Additionally, you can receive income from the trust for life or a specified number of years. When the period ends, the charity will receive the remaining assets in the trust.
Another benefit of a charitable remainder trust is that you can avoid capital gains taxes on any appreciation in the value of the assets donated to the trust. Any property appreciation goes to the charity – not to you or your heirs – so it’s a great way to reduce your estate taxes.
Types Of Assets That You Use In A Charitable Remainder Trust
The following are a few types of assets that you can use in a charitable remainder trust:
Cash. One way to fund a charitable remainder trust is by using money. You can use cash to fund the trust in two ways: by investing it in it or gifting it to the trust.
If you choose to invest some money in the trust, you will receive an income tax deduction for the fair market value of the cash. The trustee will then use the cash to purchase assets for the trust. These assets can be anything from stocks and bonds to real estate and businesses. The trustee will then use the cash to fund the trust.
When using cash in a charitable remainder trust, an essential factor is how the funds will be dispersed. For example, some trusts allow periodic payments to be made to the beneficiaries. Others may require that the entire amount be paid out upon the grantor’s death.
Regardless of how the trust is structured, it is crucial to ensure sufficient funds are available to meet the needs of the beneficiaries.
Stocks & Bonds. One way to give a charity gift and get tax benefits is to use stocks and bonds in a charitable remainder trust. With this type of trust, you can donate appreciated assets, get an immediate tax deduction, and have the charity sell the assets and use the proceeds to pay you an income for life or a term of years.
If you have held the securities for more than a year, you will not have to pay any capital gains taxes on the sale. And, if you itemize your deductions on your tax return, you can deduct the fair market value of the securities.
Real Estate. You can donate assets like real estate and receive an immediate tax deduction. The charity then sells the assets and uses the proceeds to fund its programs.
If you consider donating real estate to a charitable remainder trust, you should keep a few things in mind. First, you must appraise the property to determine the correct value for tax purposes. Second, you will need to find a qualified trustee who will oversee the sale of the property and ensure that the charity correctly uses the proceeds.
Artworks. An art collection can be a significant funding source for a charitable remainder trust. You can sell art collections, and the proceeds will fund your charitable remainder trust.
The donors would receive income from the sale of the art, and when they die, the charity will receive the principal. The donors could also continue to own and enjoy the art during their lifetimes.
A significant advantage of using art in a CRT is that it provides an immediate source of income to fund the trust. A disadvantage is that the value of art can be volatile, so there is some risk that the value of the trust could decline if the value of the art falls.
How Can A Donor-Advised Fund Compliment Your Charitable Remainder Trust?
A donor-advised fund (DAF) is a charitable investment account that allows donors to make a charitable contribution, receive an immediate tax deduction, and then recommend grants from the fund over time.
Donors can recommend grants to multiple charities over time. Many people use DAFs to support their favorite causes on an ongoing basis or to create a charitable legacy for their families.
A DAF is like a personal foundation in that it is a separate legal entity from the donor, but it is much simpler and usually less expensive to set up and maintain. The charity that sponsors the DAF holds and invests the funds and provides administrative support.
Charitable remainder funds exist only for a particular timeframe, usually the life span of the donor. During this time frame, donors enjoy the income interest from the charitable remainder trust.
When it ends, the remaining assets are turned into a remainder interest that is deposited into a Donor Advised Fund.
A donor-advised fund can be a great complement to a charitable remainder fund. Here are a few ways they can work together:
- A DAF can be used to help cover the administrative costs of a charitable remainder fund.
- Naming the donor-advised fund as the remainder beneficiary relieves the strain related to determining the ultimate charity at the beginning of the charitable remainder trust.
- The donor’s family may become vested in the donor’s legacy after passing.
- A DAF fund can help pay out the distributions from the charitable remainder fund to the designated charities.
- Suppose a donor wishes to accelerate a CRT to contribute more to charity now or in the near future. In that case, they could cash out their revenue interest or collapse it entirely into a donor-advised fund.
Using Charitable Remainder Trust For Your Charitable Giving
A charitable remainder trust can be an excellent way to provide for yourself while also making a gift to charity. You can use a charitable remainder trust to gift property, such as real estate, stocks, and bonds. You can name the charity of your choice as the trust beneficiary.
You can specify how the charity will use the funds from the trust. For example, you may want the charity to use the funds for educational or medical research.
You should consider creating a charitable remainder trust if you are charitably minded. Working with an experienced attorney or financial advisor who can help you navigate the various rules and regulations surrounding this type of trust is essential.
Weiner Law is a highly respected law firm in San Diego, CA, regarding estate planning and law. They can help you with charitable remainder trusts and other kinds of trusts and give you advice that best suits your situation.
Weiner Law’s focus is on assisting clients to leave a great legacy, and they keep a good relationship with all of their clients since estate planning is a long-term commitment.