Gregory S. DuPont
Leaving a Legacy with a Charitable Remainder Trust
A charitable remainder trust (CRT) is an irrevocable trust that can produce an annual stream of income for beneficiaries for their lifetime while also allowing you to donate the remainder of the trust to your favorite charities. It is one of many estate planning tools you can use to protect your assets and provide for your family after your death.
How does a Charitable Remainder Trust work?
A CRT is considered “split interest” meaning it consists of charitable and non-charitable beneficiaries. You can name one or more non-charitable beneficiaries to receive a potential income stream. This can be yourself, your child or anyone else, but the non-charitable beneficiaries can only receive the potential income for up to 20 years. You are also able to name one or more charities as charitable beneficiaries. You may also be able to use the trust in conjunction with a Donor Advised Fund (DAF) to provide flexibility in the selection of the ultimate charity beneficiaries.
It’s important to remember that a CRT doesn’t work unless you fund it. You will need to place your assets, such as bank accounts, stock, and real property, into the trust’s name. Ideally, these assets are items that have already appreciated in value – such as highly appreciated stock. At this point, you decide what the beneficiary’s annual income stream will be and how long the trust will last. It can be anywhere between 5 to 50 percent of the asset’s fair market value for any time up to 20 years. You must also decide how much will be donated to the charitable beneficiary after the trust expires. The charitable beneficiary must receive at least 10% of the fair market value of the assets. However, whatever is left in the trust after it expires must be donated, so the final donation could be different than anticipated. These choices are all part of the planning process to determine what is an appropriate donation, and impact how much of a tax deduction will be allowed.
Types of Charitable Remainder Trusts
There are two main types of Charitable Remainder Trusts, a Unitrust and an Annuity trust.
Charitable Remainder Unitrust
The setup of a Charitable Remainder Unitrust (CRUT) is the same as any CRT, but the income stream of a CRUT is based on a set percentage of the fair market value of an item that gets reevaluated every year. This can be beneficial when an asset has the potential to appreciate over time, take stocks and real estate for example.
A CRUT also gives you the possibility to add additional assets to your trust after the initial setup. With a CRUT you have the potential to have a larger stream of income than anticipated while also being able to leave more to your chosen charities.
Charitable Remainder Annuity Trust
A second type of CRT is a Charitable Remainder Annuity Trust (CRAT). Nothing can be altered to a CRAT after its setup. The annual income stream comes from a fixed dollar amount and you cannot add any additional assets.
A CRAT is beneficial when you want to control your income stream. The income from a CRT is taxed, so keeping a consistent income may keep you in your desired tax bracket. Under a CRUT the income percentage could appreciate, which may bump you into a higher tax bracket.
The Pros and Cons of a Charitable Remainder Trust
A CRT is a great way to pursue your philanthropic goals while also providing for yourself or other beneficiaries listed in your trust and can be a very important tool in minimizing your overall tax burdens. However, it is important to understand some of its pitfalls.
- Additional Income and Tax Deductions - A CRT has the potential to provide your chosen beneficiaries with a great source of additional income. First, the initial donation of assets will provide a charitable income tax deduction. Then, the assets will continue to provide annual taxable income for however the long the trust stands.
- Giving Back to Charity - Knowing that a portion of your assets will go to a charitable cause that is important to you can be very gratifying.
- CRTs are Irrevocable Trusts - An Irrevocable Trust is a type of trust that cannot be modified or annulled after creation.
- Drafting a CRT is complicated - CRTs are a complex form of trust. They are not something the average person can draft on their own. You’ll want to work with an estate planning attorney experienced in creating these types of trusts.
A Charitable Remainder Trust can be an incredibly gratifying tool that provides a wealth of benefits. If you are considering a CRT contact the Law Offices of DuPont and Blumenstiel at (614) 389-9711. Our experienced estate planning attorneys would be more than happy to discuss whether a Charitable Remainder Trust is the right addition to your estate plan.
Want to learn more about trusts? Check out our Consumer’s Guide to Estate Planning in Ohio.