Is a charitable remainder trust right for you?

If you’ve ever considered donating assets to a charity after your death, a charitable remainder trust might be an option to explore.

A charitable remainder trust, or CRT, is an estate planning tool that allows you to plan for and pursue your philanthropic goals, provides you an income during your lifetime and can offer numerous tax advantages.

There are various kinds of CRTs, but the two main types are:

Charitable remainder annuity trust – This type of trust pays a fixed annuity amount annually and new contributions are not allowed. The amount of the annuity will never change.

Charitable remainder unitrust – This type of trust pays a fixed percentage of the trust’s assets, which are reviewed annually, and additional contributions are allowed. The income paid every year will vary.

First, you create an irrevocable tax-exempt trust, a trust with terms that cannot be modified once it is signed. Then appoint a trustee.

If you meet IRS eligibility requirements, you can serve as the trustee of your charitable remainder trust, which allows you to:

• Retain control of your CRT.
• Direct trust investments (or hire an investment manager to do so).
• Manage distributions and pay trust expenses.

Although naming yourself as trustee might be tempting, managing investments and accounting responsibilities for a trust can be complex, and as trustees must act in accordance with the guidelines set out in the Uniform Prudent Investor Act, it might make more sense to hire a professional instead.

Once a trust is established, the grantor has some flexibility in selecting the income beneficiaries. They can name themselves, their children, or name a combination of both as income beneficiaries.

They also have the power to name the charitable beneficiary, as well as to change that beneficiary in the future, or grant the power to do so to a third party or trustee.

The next step is to make a donation to the trust.

This donation can be in the form of cash, stocks, mutual funds, real estate, private business interests and certain other assets. Once you make the donation, you will receive a partial tax deduction for the gift and the assets will be sold by the trustee, who will then reinvest the proceeds. Capital gains tax will not be due at the time assets are liquidated, which allows more money to be put to work to generate income for the income beneficiaries.

Then, depending on how you set up the trust, you or your beneficiaries can receive income from the CRT. This income can be paid monthly, quarterly, semi-annually or annually. The IRS requires the annual payout to be at least 5%, but no more than 50%, of the trust’s assets.

You can set the trust up so that it terminates after a timeframe of your choosing or upon your death. Once the trust terminates, all the remaining assets are then distributed to the charities you’ve designated as beneficiaries. These must be qualified public or private charities as determined by IRS rules.

There are a number of advantages to a CRT, and a few disadvantages. Consider enlisting the counsel of an estate planning professional as well as your legal and tax advisors prior to implementing these sophisticated strategies.

1. You will receive a partial tax deduction for the assets you donate.
2. No capital gains taxes are paid when the donated assets are sold.
3. Donated assets are no longer part of your estate.
4. You can receive an income stream from the reinvested proceeds of the CRT.
5. You can decide which charities will receive the assets of the CRT upon termination.

1. The CRT is irrevocable, meaning that with very few exceptions, it cannot be changed once it is created.
2. It usually requires a donation of substantial assets to make sense.
3. Legally, you no longer have control of the assets in the trust.
4. Any part of your estate that goes into the CRT will go to the charitable organization of your choice, and not to your heirs. However, in some cases, they or the grantor may still receive income from donated assets.
5. Distributions from the CRT to the income beneficiaries might be taxable as ordinary income.
6. Depending on the amount of assets donated, you may not be able to take the full tax deduction in the same year as the donation. However, it can be spread out over a five-year period.

If you want to create a legacy of giving after you pass, creating a charitable remainder trust can offer you immediate tax deductions as well as provide income for you as long as you are alive. There are many ways you can use a CRAT or CRUT as part of your estate planning strategy, including using it in conjunction with a donor-advised fund.

If you think a charitable remainder trust might be right for you, talk with a qualified attorney and tax advisor. An Edelman Financial Engines advisor can help you weigh the pros and cons to determine what makes sense as part of your overall financial plan.