What is a charitable remainder trust?
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UPDATED: Jul 15, 2021
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A charitable remainder trust is a fund that is set up to provide income over a period of time to a stated beneficiary–either the donor himself or a chosen recipient. Once that period of time is up, the beneficiary in question will stop receiving payments, and whatever is left of the charitable remainder trust will be donated to a specified charity on behalf of the original estate holder.
Understanding a Charitable Remainder Trust
When you establish a charitable remainder trust, generally that involves actually donating money or property to a specific charity. The charity then takes ownership of the donated goods/item or principle balance of the money. However, the grantor or stated beneficiary continues to be permitted to use the money or property in some form. For example, he may receive the interest payments while the charity owns the principle.
In many cases, the charity that the money has been donated to will manage the assets in order to produce income, until the point specified in which the funds will cease to pay out and the remaining value goes to the charity itself.
You may choose to set up a charitable remainder trust to pay out a fixed dollar amount per year, or you may set it up as a percentage of the value the funds are currently worth each year. How you do this is up to you. In some cases, charities actually offer charitable remainder trusts that you can invest in, taking much of the work out of this form of investment.
Benefits of Charitable Remainder Trusts
Charitable remainder trusts hold a number of benefits, for both the donor and the recipients. The donor, (the original holder of the estate funds), receives a fairly sizable tax break by setting up a CRT, because the assets placed into the trust can be treated as an immediate deduction–specifically, you may take an income tax deduction for the expected income value of the funds, spreading the deduction out over five years. Further, the funds are designated as a gift, meaning that they will not be taxed under an estate tax, since the donor has officially given them up and thus they do not count as part of the estate.
Finally, property that has increased significantly in value over time can be put into a charitable remainder trust, at which point it is technically liquidated into cash, without the owner being forced to pay a capital gains tax–the savings involved with this benefit alone can be striking.
Establishing a Charitable Remainder Trust
Keep in mind that capital remainder trusts are irrevocable, meaning once they’re set up, they cannot be canceled, and the property in the trust is no longer legally yours. You may, however, be able to retain some control over how the funds are managed and you may also be able to change the charity designated as the beneficiary. However, your right to do this will depend upon the specific nature of the trust in which you set up. This isn’t a decision to be made lightly, and if you’re interested in setting up such a trust, you should meet with an estate planning lawyer to thoroughly discuss your options and ensure that you fully understand the process.