Sometimes, certain individuals will want to set up a trust with a potential ongoing income stream while benefiting one (or more) charitable organizations that are especially important to them. These particular trusts are known as charitable remainder trusts (CRTs) and can offer a dual approach with intended charitable beneficiaries alongside long-term income. However, they are complicated to craft and require the assistance of a knowledgeable estate planning attorney to open correctly.
How a Charitable Remainder Trust Works
A CRT is considered a “split-interest” giving vehicle that allows the donor to make contributions to the trust while being eligible for a partial tax deduction based on the CRT’s assets that will pass onto charitable beneficiaries. The trust’s owner can name him or herself to receive potential income for a term of up to 20 years or for the life of one or more non-charitable beneficiaries. The remainder would go to one or more designated charities.
However, it’s important to note that should the donor ever want to change the intended charitable beneficiary, that would require a formal amendment to the trust, which should be written and executed by an estate planning attorney.
The Two Primary Types of CRTs
The first is a charitable remainder annuity trust (CRAT), which distributes a fixed annuity amount annually and additional contributions are not allowed.
The second are charitable remainder unitrusts (CRUTs), which distribute a fixed percentage based on an annual revaluation of the trust’s assets while allowing additional contributions. These disbursements are permanently fixed and cannot be changed once set.
In both cases, contributions are irrevocable and the trust is required to distribute a portion of income or principal to either the donor or another designated beneficiary. At the end of the designated lifetime or term for the income interest, the trust’s remaining assets are distributed to one or more charitable beneficiaries that the donor initially designated.
Main Benefits of CRTs
There are three primary benefits to opening a CRT:
- Potential tax deductions when the trust is funded based on a calculation of how much of the remainder will be disbursed to a charity. One such deduction includes up to 60% of the donor’s adjusted gross income (AGI) and 30% in certain cases with appreciated assets (a CPA could advise on this further).
- Protecting the long-term value of appreciated assets by placing them in a CRT, which in most cases would be tax-exempt when the trust sells said assets.
- Protecting investment income in certain situations where no income tax is generated, and capital gains taxes are eliminated. In cases of a spouse’s death, if the CRT’s sole human beneficiary is the decedent’s surviving spouse, there is no estate tax as the spouse’s interest qualifies for the marital deduction and the charity’s interest qualifies for the charitable deduction.
Perhaps most importantly, a CRT requires the guidance of estate planning experts to ensure the process is done legally and correctly. Jackson and Brandon families count on The Law Offices of Rusty Williard to help them craft detailed and thoughtful charitable remainder trusts. Call (601) 824-9797 today to learn more.