All About Charitable Remainder Trusts: A Beginner’s Guide
With rising interest rates, Charitable Remainder Trusts are once again gaining popularity. In this current market environment, they can be a very effective tool to accomplishing your philanthropic goals while also creating a source of income for you and your family. CRTs are a type of trust that allow you to donate assets to a charity while still receiving income from those assets. In this blog post, we’ll cover everything you need to know about CRTs, including what they are, how they work, and how to set one up.
What is a Charitable Remainder Trust?
A Charitable Remainder Trust (CRT) is a trust that pays a fixed percentage of its assets to one or more beneficiaries for a set period of time. At the end of that time period, the remaining assets are donated to a charity or charities of your choice. The income payments can be made annually, quarterly, or even monthly, depending on the terms of the trust.
Benefits of A Charitable Remainder Trust
There are many benefits associated with a Charitable Remainder Trust. They can be particularly appealing to retirees who are looking for a predictable income stream while also receiving major tax benefits. When you donate assets to a CRT, you can take an immediate tax deduction for the present value of the future charitable donation. Additionally, the assets transferred to the trust are excluded from the donor’s estate, minimizing estate taxes. Finally, the assets can be sold within the trust and no capital gains taxes are incurred.
How do Charitable Remainder Trusts work?
A donor transfers property which may include cash, publicly traded securities, certain closely held stocks, artwork and/or real estate, to an irrevocable trust. Because the trust is irrevocable, the assets contributed to the Charitable Remainder Trust are removed from the donor’s estate and excluded from estate taxes at death. The donor will also qualify for an immediate charitable income tax deduction.
The trustee of the trust then sells the assets at full market value, incurring no capital gains tax, and re-invests the proceeds in income producing assets. For the remainder of the beneficiary’s life or for a set period, the trust pays out an income stream based on the terms of the trust (typically between 5%-10% of the trust’s assets). When the beneficiary dies or the trust term ends, the remaining assets go to the charities chosen. Thus, the name of the trust is a charitable remainder trust.
As noted previously, the grantor may qualify for a charitable income tax deduction when the CRT is created. This deduction is equal to the present value of the charitable organizations’ remaining interest, which are the assets that will pass to the charitable beneficiaries. To pass muster with the IRS, the remainder donated to charity must be at least 10% of the initial net fair market value of all property placed in the trust. In recent years, however, rock-bottom interest rates made it difficult, if not impossible, for many CRTs to qualify. As interest rates rise, it becomes easier to meet the 10% threshold and to increase annual payouts or the trust term without disqualifying the trust.
Setting up a Charitable Remainder Trust
Setting up a Charitable Remainder Trust can be a complicated process, so it’s important to work with an experienced attorney, accountant, and wealth advisor. Because these vehicles are more complex, it’s worth noting that they tend to be more costly to set up and maintain. There are upfront legal costs to get the trust in place. Additionally, there are ongoing annual tax filings that are required. As a result, CRTs are typically a better solution for significant sized gifts and assets where the benefits outweigh the costs.In conclusion, a Charitable Remainder Trust can be a useful tool to support a charitable cause while still receiving income from your assets. They offer some immediate tax benefits and can be particularly appealing to those looking to maintain a reliable source of income. If you’re interested in setting up a CRT or learning more about how they could fit into your long-term retirement and estate plan, contact our team here at ML&R Wealth Management. Our wealth advisors are well-versed in these advancing planning techniques.