Imagine a financial tool that not only supports your financial security but also enables you to leave a lasting philanthropic legacy. That’s the power of a charitable remainder trust (CRT), a charitable giving strategy that lets you enjoy a stream of income, reap various tax benefits, and ultimately support the causes you care about.
In this guide, we explore CRTs, looking at how they work and why they might be the key to fulfilling your financial and philanthropic goals.
What Are Charitable Remainder Trusts?
A charitable remainder trust is designed to provide income to the donor or other named beneficiaries. Here’s how they work: When setting up a trust, you name a trustee, an income beneficiary, and a charitable beneficiary. When you contribute funds to the CRT, the trustee will manage, invest, and sell the assets to produce income that’s distributed to the income beneficiary. After the trust term, either a lifetime or a period of up to 20 years, the remaining funds go to one or more designated charitable organizations.
There are two main CRT types: charitable remainder annuity trusts (CRATs) and charitable remainder unitrusts (CRUTs). CRATs provide a fixed annual payment, whereas CRUTs offer a fluctuating annual payment based on a percentage of the trust’s value.
Charitable remainder trusts, regardless of type, are considered irrevocable. This means you can’t reverse your contributions, and the trust itself cannot be easily altered or revoked.
Why Consider a Charitable Remainder Trust?
CRTs are not just a tool for making charitable donations; they are strategic financial instruments that offer a range of benefits for donors.
Tax advantages
A CRT offers several tax benefits, primarily by allowing donors to avoid capital gains tax when transferring appreciated assets to the trust. When assets are sold within the trust, the capital gains tax that would otherwise be due upon sale is deferred, allowing the full value of the assets to be reinvested and grow tax-free, potentially increasing the income distributed to the beneficiary.
While subject to taxes on income distributions, donors can receive a partial income tax deduction — with a few deduction limits. In the same tax year, donors can deduct charitable contributions up to 60% of their taxable income if making a cash donation and up to 30% if contributing appreciated assets. The deduction amount is ultimately determined by calculating the present value of the remainder that the IRS estimates will eventually go to your chosen public charity.
Income stream
A CRT provides a steady income stream to the donor. This can be structured as either a fixed annuity payment (in the case of a CRAT) or a variable payment based on the annual valuation of the trust (in the case of a CRUT). This feature is particularly attractive to individuals, such as retirees, seeking a supplementary income source.
Estate planning
Since CRTs are irrevocable, the assets placed in them are removed from the donor’s estate. This can potentially reduce estate taxes, preserving more of the estate available for heirs or charitable causes. For individuals concerned about the size of their taxable estate, a CRT can effectively reduce future estate tax liabilities while fulfilling their philanthropic objectives.
Philanthropic goals
By setting up a CRT, donors can support the causes they care about while receiving short- and long-term financial benefits. This strategic arrangement often allows for a more substantial contribution, as the assets within the trust potentially grow over time, free of immediate capital gains taxes. Donors can make a meaningful impact on the causes close to their hearts, often in a more significant way than would have been possible through outright donations.
Do you want to learn more about whether a trust aligns with your financial planning and charitable giving strategies? Our financial experts are here to guide you. Contact us today and let us help you realize your charitable and financial goals.
