For many people, philanthropy is a cherished value. And in many ways, philanthropy is relatively simple. You cut a check to your favorite charity and that’s it.
However, if you want to leave a legacy of philanthropy, you’re going to want to do more than give the occasional donation.
You need to set up a charitable remainder trust.
Looking for information on trusts in general? Check out our Complete Guide to Trusts
What is a Charitable Remainder Trust?
A charitable remainder trust (CRT) is a type of irrevocable trust that allows you to donate assets to a charity while maintaining some control over how the assets are used. You retain the right to receive income from the assets in the trust for your lifetime, or a fixed period of time. Once that period has ended, the remaining assets in the trust are donated to the charity (hence the word “remainder”).
Charitable remainder trusts are also called “split trusts” due to the fact that the benefits are split between you and the charity of your choice.
When you (the grantor), transfer assets in the trust you are essentially renouncing all ownership rights to those assets. The fact that it’s irrevocable means that you can’t change the terms of the trust or who will receive the assets without the express permission of the beneficiaries.
Charitable remainder trusts are tax-exempt and they also allow you to reduce your taxable income.
There are two types of charitable remainder trusts that can be established. An annuity trust pays you a fixed amount of income each year, based on the initial value of the assets in the trust. No additional assets can be added to a charitable remainder trust.
A unitrust pays you a variable amount of income each year, based on a percentage of the fair market value of the trust assets (revalued annually). Unlike an annuity trust, assets can be added to a charitable remainder unitrust.
What Are the Benefits of a Charitable Remainder Trust?
One of the key benefits of a charitable remainder trust is that it allows you to donate assets to the charity of your choice while also receiving a stream of income for a set period of time. This can be especially beneficial if you are looking to donate highly appreciated assets, such as stocks. When the stocks are sold by the trust, they are not subject to capital gains taxes and retain their full value. You pay the taxes over time as you receive payments from the trust.
Another benefit of a charitable remainder trust is that it allows you to retain some control over how the assets in the trust are used. For example, you can specify that the assets be used to fund a specific project or program at the charity.
Additionally, charitable remainder trusts reduce your tax burden. Trust assets are not subject to estate taxes and, in many cases, the trust can also reduce your taxable income.
Who Might Benefit from a Charitable Remainder Trust?
There are a number of people who may benefit from a charitable remainder trust. These include:
- Retirees who want to supplement their income while also donating to a favorite charity
- Individuals seeking to reduce their taxable income
- Individuals who want to donate appreciated assets and avoid paying capital gains tax on the appreciation
- Those who are passionate about philanthropy but also want to retain some measure of control over how their assets are used
The reality is that charitable remainder trusts are perfect for those who care about philanthropy and also want to receive certain benefits in return for their donations. Typically, charitable remainder trusts are created as part of the estate planning process.
How Long Can a Charitable Remainder Trust Last?
A CRT can be set up in one of two ways. The terms can specify that the trust is active for the lives of the beneficiaries or for a set period of time, no longer than 20 years.
One factor that determines the duration of a charitable remainder trust is the “10% rule”, which states that the value of the CRT remainder that the charity receives must be at least 10% of the value of the trust at the time of funding. This puts limitations on how young an individual can be and the annual payment they receive from the trust. If the payment is too large over too many years, the value of the CRT remainder will be less than 10% of the original value.
How are the Payouts Calculated?
According to the IRS, payments from the trust must be at least 5% of the trust assets and can be no more than 50%. The exact amounts depend on the number of years specified in the creation of the trust or the life expectancies of the beneficiaries if it’s a lifetime trust.
The payments also depend on which type of trust is in place. Charitable remainder annuity trusts pay out the same amount each year, regardless of whether the value of the trust increases or decreases. Charitable remainder unitrusts pay out a fixed percentage of the trust value that year, and the value of the trust is recalculated every year.
Are There Disadvantages to a Charitable Remainder Trust?
The primary disadvantage to a charitable remainder trust is that it is irrevocable. This means that you can’t change the terms of the trust or who will receive the assets without the express permission of the beneficiaries. This is in contrast to revokable trusts, which allow modifications to be made by the grantor.
And while this is more of a challenge than a disadvantage, setting up a charitable remainder trust can be complex and there are certain legal requirements that must be met in order for it to be valid. In light of this, it’s best to work with an attorney to ensure that the trust is properly established.
Should You Establish a Charitable Remainder Trust?
So, is a charitable remainder trust right for you? Ultimately it depends on what your objectives are. If you have the following goals, then a charitable remainder trust is probably a smart idea:
- You want to use your assets to support a cause you care about
- You want to donate appreciated assets (stocks, etc.) without incurring capital gains taxes
- You want to generate income for you and your beneficiaries while achieving the above two objectives
However, establishing a charitable remainder trust does require giving up control of assets for a time period and there are expenses involved in working with an attorney to establish a trust. Additionally, there is some amount of work required every year to keep the trust up to date.
If the above requirements run counter to your goals and desires, there are other ways you can still financially support your charity of choice.
