What is a Charitable Remainder Trust and How Does it Work?

What is a Charitable Remainder Trust and How Does it Work?

A Charitable Remainder Trust (CRT) is a type of irrevocable trust that generates a fixed income for you as the donor or designated beneficiaries, while donating the remainder of the assets to a charity.   You can name yourself or someone else to receive a potential income stream for a term of years, or for the life of one or more non-charitable beneficiaries.  The grantor also names one or more charities to receive the remainder of the donated assets.

The grantor transfers assets into the trust, such as cash, stocks, real estate, private business interests, and they become eligible to take a partial tax deduction, based on specific rules.  You or your designated beneficiaries can receive income annually, semi-annually, quarterly or monthly.  You will choose a tax-exempt charitable organization to the be beneficiary of the CRT, and after the specified duration or the death of the last income beneficiary, the remaining CRT assets are distributed to the designated charitable beneficiaries.

CRT’s offer many benefits and are popular for individuals who have a significant amount of wealth, highly appreciated assets, or are looking for a fixed income for retirement, and they want to donate a portion of their wealth to one or more charitable causes.  Using a CRT can accomplish all of these goals, by allowing the donor to receive a fixed income, obtain tax advantages, and donate to a charity.   If you have highly appreciating assets, the CRT can help preserve the value of these assets.  For example, if you contribute a non-income producing property to a CRT, you to contribute that property to the trust and when the trust sells it is exempt from tax. This allows you to preserve the full fair market value of the assets rather than reduce it by large capital gains taxes.  There are also tax benefits, for example you have the potential to take a partial income tax charitable deduction when you fund the trust, which is based on a calculation on the remainder distribution to the charitable beneficiary.  Furthermore, the CRT’s investment income is exempt from tax. However, it is important to note that the named income beneficiary will pay income tax on the income stream received.

The CRT is a type of irrevocable trust which means you cannot change the distribution of funds once they have been transferred.  The CRT may be a useful tool for a portion of your assets and should be combined with other Estate Planning tools. 

Contact Asset and Estate Law, PLLC. for a complimentary consultation to learn more about Estate Planning and Asset Protection.