Charitable Remainder Trusts

Wondering about charitable remainder trusts? Kevin C. Martin, Attorney at Law, PLLC, guides you through. Reach out to us today for more information.

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What You Need to Know About Charitable Remainder Trusts

A Charitable Remainder Trust (CRT) is an irrevocable trust that is created for the benefit of a charitable institution. The person setting up the trust, known as the donor or the grantor, can receive a certain income from the trust and donate the remaining funds to a specific charity. In other words, CRTs enable donors to pursue their philanthropic goals while generating income and enjoying tax reduction benefits.

A charitable remainder trust has become a popular estate planning tool, as it can reduce income taxes. This guide will explore everything you need to know about the trust, including how to set one up.

However, consulting with a qualified estate planning attorney before setting up a trust is beneficial. Kevin C. Marin, Attorney at Law, can provide legal advice and guide you through the challenges of drafting trust documents. Reach out to us if you need personalized guidance.

What Is a Charitable Remainder Trust?

Charitable remainder trusts are also called split-interest trusts. That means any interest gained by the trust is split as income interest and remainder interest. While the income interest provides an income stream for the beneficiaries, the remainder of the interest goes to one or more charities.

Charitable remainder trusts are usually created to advance religious, educational, or social objectives while enabling donors to minimize tax liability. Assets going into the trust can include real estate, cash, securities, or some other types of assets.

Different Types of a Charitable Remainder Trust

A charitable remainder annuity trust (CRAT) and a charitable remainder unitrust (CRUT) are the two common types of CRTs. Both can be made while the donor is still alive or after the donor’s death. The main difference between them is how they pay beneficiaries.

Charitable remainder annuity trusts pay a certain dollar amount to the beneficiary each year. That amount is fixed. It can be at least 5% but no more than 50% of the value of the assets placed in the trust when it was created. Additional contributions after the trust is first established are not possible.

Income payments to beneficiaries in charitable remainder unitrusts are based on a fixed percentage of the value of the trust assets. Although these payments also have to be at least 5% but no more than 50% of the fair market value of the assets, they are valued annually, so the payments can fluctuate. But, additional contributions are possible.

How CRTs Differ From Other Types of Trusts

While some other types of trusts are created to protect assets or to take care of a family member with special needs, a charitable remainder trust works differently. After transferring the assets into the trust, the trust pays income to the donor and up to 20 beneficiaries for a certain time period. But, at the end of that period, the remaining assets are passed to designated charitable organizations.

A charitable lead trust, on the other hand, represents the opposite concept. While trust income is paid to designated charitable beneficiaries, the remainder interest is either reverted to the grantor or paid to non-charitable income beneficiaries at the end of the trust term.

Benefits of Establishing a Charitable Remainder Trust

There are several benefits of a charitable remainder trust, including the following: 

  • Providing an income stream for the grantor 

  • Supporting designated charitable beneficiaries and fulfilling your philanthropic goals

  • Reducing estate taxes

  • Saving the value of highly appreciated assets 

  • Potential to take an income tax charitable deduction when you fund the trust 

According to the Internal Revenue Service (IRS), contributions to a CRT qualify for a partial tax deduction. Moreover, the trust’s assets qualify for an estate tax exemption. However, bear in mind that income payments from a CRT to the non-charitable beneficiaries are taxable. You will pay capital gains tax on income payments as required by the IRS.

How to Set Up a Charitable Remainder Trust

There are several important steps that have to be considered when creating a CRT, including:

  • Consulting an estate planning attorney

  • Identifying the organization or the cause you would like to support

  • Naming the income beneficiary 

  • Determining which assets you will transfer to the trust

  • Selecting the trustee who will manage the trust

  • Setting the payout rate and the time period

  • Drafting the trust document

  • Funding the trust

When the trust ends, the remaining assets are distributed to the chosen charitable beneficiary. But, the remaining trust assets have to be at least 10% of the value of the property placed in the trust initially.

Considerations Before Creating a CRT

Since a charitable remainder trust is an irrevocable trust, assets transferred to the trust can’t be taken back, and it can’t be modified. However, these assets are also removed from the grantor’s estate, so they won’t be part of the probate nor subject to estate taxes.

Understanding how these trusts are funded can be crucial. The type of assets used can make the difference between capital gain or capital loss to the donor. An estate planning attorney skilled in estate tax planning will be able to assist you.

Need More Help with CRTs? Contact Us Today

A charitable remainder trust may be a good choice if you want to donate to charity and get an immediate charitable income tax deduction. It can also be beneficial if you use assets to generate an income stream for yourself or a dependent. 

But, when deciding to create one, consulting with a trust attorney is always wise. An estate tax protection attorney at Kevin C. Martin, Attorney at Law PLLC, understands the tax implications of CRTs and can help you determine whether this strategy is best to minimize estate taxes and maximize wealth transfer. They can also assist you in establishing one.

Kevin C. Martin, Attorney at Law, PLLC, has been handling estate planning matters for years and has helped countless clients in the DC area. We can guide you through the challenges and explain how best to use charitable trusts. 

Schedule a free consultation with us today!