A Charitable Remainder Trust (CRT) can be a smart, strategic vehicle used to generate income, reduce tax liability and do good for a charity. They’re not for everyone, though.
Learn more about how you can use a CRT to your advantage, whether or not one is right for your goals, and all the benefits (and potential drawbacks) Charitable Trusts offer, so you can make a smart decision before deciding whether or not it may be a good move to make as a part of your Estate Plan.
What is a Charitable Remainder Trust?
Charitable Remainder Trusts are an Estate Planning tool that might allow you to earn income while reducing both income tax now, as well as estate taxes after you pass away. These tax-exempt Irrevocable Trusts are set up to distribute income to a named beneficiary (you or someone else) for a set duration of time. At the end of that time period, any value remaining in the Trust is dispersed to a predetermined charity.
Charitable Remainder Trusts are just one option available in Estate Planning. Want to learn more about which type of Trust may be right for you? Check out “An In-Depth Look at the Different Types of Trusts” to learn more!
What is the Difference Between Trust and Charitable Trust?
The biggest difference between a standard Trust and a Charitable Trust is that Charitable Trusts can last forever, which is not always the case with private Trusts. The designated trustee and beneficiaries of a private Trust exist to carry out the Trust. With charitable Trusts, it is the state attorney general (or whoever represents the public interest) who administers the Trust.
How Does a Charitable Remainder Trust Work?
Under the right circumstances, Charitable Remainder Trusts can be excellent, effective Estate Planning vehicles that offer flexibility by allowing you to maintain control. They let the Grantor (the Trust owner) put a plan into action that will provide for future philanthropic gifts, while still remaining financially beneficial to a main beneficiary in the meantime.
The most rewarding aspect of CRTs is they’re a great way to use a vehicle that provides income through the retirement years while offsetting taxes, and they’ll ultimately one day benefit a charitable organization.
Because you can continue to make contributions to some CRTs, they can be a great way to allow your assets to grow inside a Trust, while taking advantage of the income it provides. You can name either yourself or someone else as beneficiary, and then enjoy an income stream for a number of years (no more than 20, or for the lifetime of a non-charitable beneficiary).
When Would You Use a Charitable Remainder Trust?
Charitable Remainder Trusts have many benefits and can be used when charitable contributions are an important part of the legacy you want to leave. They’re an excellent way to diversify a highly appreciated portfolio. If you have a high-appreciating asset and want to set up a plan now that provides for the future, a CRT may be exactly what you have been looking for.
Because CRTs allow you to take advantage of benefits now, but will eventually benefit a charitable organization in the future, they can be the best of two worlds. You can enjoy an income stream for many years, knowing that you’ve also set up a way to honor a worthy cause.
What are the Benefits of a Charitable Trust?
Though they do not work for everyone, CRTs have several benefits. Since they have tax benefits, they’re an effective tool to use in your Estate Planning efforts if you’re looking for ways to reduce tax liability while benefiting a charity. Other benefits can include:
Reduce income taxes now through a charitable income tax deduction
Convert any appreciated asset or assets into something that offers lifetime income
Eliminate capital gains when assets are eventually sold
Benefit a charity or charities
Earn protection against creditors for the asset(s) inside the CRT
Earn more income now (and throughout your life) than you would if you just sold assets on your own
Allow charities to plan for your contribution, expecting future benefits from the Trust
What Are the Downsides of a Charitable Remainder Trust?
Even though there are a number of great benefits to Charitable Remainder Trusts, there are some drawbacks, too. Be sure you understand both the positive and any potential negative sides to using a CRT, so you can set up a smart vehicle that works best for you and your future goals. Some things to be aware of if you’re considering a CRT:
This type of Trust generally needs substantial assets to work
A small contribution typically won’t provide income as well as maintain enough value to be beneficial to your charity
Charitable Trusts are irrevocable by design (to offer tax benefits), so you can’t easily decide later that you want to remove assets or change the beneficiary
Typically not valuable in terms of estate tax benefits, unless you have significant wealth
You lose legal control of the assets inside the Trust
Your original charitable gift value may be reduced as you receive income
And, the higher the income payments, the more the principal value will be reduced, ultimately reducing how much the charity will one day get
If you take higher income payments, you may be reducing your income tax deduction
How Long Can a Charitable Trust Last?
Charitable Remainder Trusts can either last the lifetime of another beneficiary, or for a specified term (usually 20 years). At that point, any remaining value would go to your designated charitable organization.
Learn more about Charitable Trust tax rules.
Other Frequently Asked Questions About Charitable Remainder Trusts
People tend to have a lot of questions about CRTs. If you’re considering setting up a Charitable Remainder Trust, take the time to truly understand what they mean. Because they’re irrevocable, there can be a lot at stake - which is why we’re attempting to cover most of the questions you may have about them here.
How Much Income Can You Take From a Charitable Remainder Trust?
How much income you can take from a CRT depends on which type you originally set up - a Charitable Remainder Unitrust (CRUT), or a Charitable Remainder Annuity Trust (CRAT).
A CRUT pays you an income stream that’s based on the fair market value of the assets each year. Because fair market values will change, your income stream will fluctuate as the market does year over year.
A CRAT, on the other hand, pays you a fixed income stream that’s based on a percentage of the fair market value of the assets when they’re first put into the Trust.
Are Distributions from a Charitable Remainder Trust Taxable?
Charitable Remainder Trusts themselves are exempt from income tax. They’re designed to reduce taxable income. There’s no immediate income tax on the sale of appreciated assets in the Trust, and since the Trust itself doesn’t pay tax on its own income, it can grow tax-free. That said, annual payments to the Grantor or lead beneficiary are subject to income tax.
Charitable Remainder Trust distribution rules dictate how any payments would be subject to income tax.
What Happens if a Charitable Remainder Trust Runs Out of Money?
If a Charitable Remainder Trust starts to run out of money during the term when the lead beneficiary is receiving regular payouts, the dollar amount will likely decrease as the principal of the Trust assets shrink. If the Trust completely runs out of money, payouts will obviously stop completely, and the charity that would originally receive the balance of the Trust at the end of the term simply won’t get their money.
Unfortunately, this can happen, and because there’s not much room for flexibility with CRTs, their popularity seems to have decreased.
What is the Difference Between a Charitable Remainder Annuity Trust and a Charitable Remainder Unitrust?
There are a few key differences between Charitable Remainder Annuity Trusts (CRATs) and Charitable Remainder Unitrusts (CRUTs). Both have a final charitable beneficiary, and both are irrevocable, but there are some nuances that may make one a better option than the other for your goals and needs.
Both CRATs and CRUTs work essentially the same way, in that the contributions you make transfer assets (property or cash) into the Trust at the initial funding. The Trust is then required to distribute a portion of the principal or interest to a lead beneficiary (which, again, can be you or someone else). At the end of the term, anything remaining in the Trust would be distributed to the charitable beneficiary.
Charitable Remainder Annuity Trusts (CRATs) - No additional contributions, and a fixed percentage, based on fair market value of the original Trust value, is distributed every year.
Charitable Remainder Unitrusts (CRUTs) - Can make additional contributions, a percentage based on fair market value each year is distributed, so payments will fluctuate with the market.
Is a Charitable Trust Fund the Way to “Beat” SECURE Act?
Once the SECURE Act eliminated the benefits of a stretch IRA (which allowed lifelong tax-deferred payouts to a beneficiary after the IRA owner's passing), for some, Charitable Remainder Trusts became a hopeful replacement strategy.
First, it helps to understand why and how the stretch IRA was useful. At one time, a stretch IRA could be a tax-beneficial way to pass money from large IRAs to beneficiaries. But in December of 2019, the SECURE Act changed the rules, so now there is a 10-year maximum payout allowed. This means all money from an IRA must be distributed to the beneficiary over the course of 10 years. If the IRA has a significant balance, there could be hefty tax implications.
Because CRTs can be a named beneficiary for an IRA, the funds in the IRA can cash out, income tax free, to fund a CRT. This would allow for income to be dispersed for a determined set time to a named lead beneficiary, with the balance one day going to a charity.
CRTs can be a somewhat decent alternative to the old stretch IRA, but there are some drawbacks to note, including:
Income to a beneficiary must be no more than a predetermined amount each year that cannot be exceeded
There are minimums on the remaining value the Trust must maintain to eventually be donated to a charity
There are potential tax issues that need careful attention
The lead beneficiary’s age can come into play - if your beneficiary is an adult or older child, an IRA-funded CRT may work just fine. However, if the beneficiary is a young child, this strategy may not work to keep the minimum value appropriate
How to Set up a Charitable Remainder Trust
Setting up a Charitable Remainder Trust is actually fairly simple. In fact, you can do it in just a few steps.
Create a Charitable Remainder Trust
Check with the IRS that the charity you want to benefit is approved
Transfer assets into the Trust
Name the charity as Trustee
Create a provision that states who the lead beneficiary is - remember, this can be yourself or someone else
Decide if you want income from the Trust for life (if the beneficiary is someone else), or for a certain number of years (if you’ll be receiving income)
Upon a beneficiary’s passing, or at the end of the set number of years, any remaining assets in the Trust will go to your named charity
Setting up a Trust doesn’t have to be stressful, costly or confusing. Using a verified, trusted online service like Trust & Will means you can put together an Estate Plan that benefits everybody and everything important to you, both now and in the future.
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