If charitable giving is part of your estate plan, a charitable remainder trust (CRT) can allow you to donate to your favorite charities while retaining an income stream for you or your beneficiaries.
Before you create one, however, you need to know how it works, what the benefits are and what assets you can donate to a CRT.
What is a charitable remainder trust?
Essentially, a CRT is an estate planning tool that will allow you to donate assets to charity. At the same time, it can generate income for you or your beneficiaries. A CRT is also a tax-exempt irrevocable trust, which means:
- The trust can help you reduce taxes by letting you defer income taxes for the sale of assets donated to the trust
- Once you establish and fund the trust, you cannot change the terms or undo the transfer of assets
You can donate various types of assets to a CRT, including but not limited to cash, real estate, stocks and business interests.
How does a charitable remainder trust work?
Creating and using a CRT is relatively simple. Here is how the process typically works:
- You transfer assets to the trust.
- You receive a tax deduction for the year in which you made the donation. This partial deduction depends on the trust type, its terms, projected income payments and Internal Revenue Service (IRS) interest rates.
- The trust pays a percentage of its value annually to you or your beneficiaries.
- The payments continue for 20 years or the entire life of one beneficiary.
- When the trust term ends, the trust transfers the remaining assets to your designated charities.
There is no need to worry if there will be enough assets to donate to charity. According to the IRS, the donation must be at least 10 percent of the value of all assets you placed in the trust.
What are the benefits of a CRT?
The primary advantage of a CRT is that it can give you an immediate tax deduction. Moreover, you gain a consistent income stream for two decades or life.
In the end, you will also provide a significant donation to charities you want to support, even if you are no longer around to make that donation.
Charitable remainder trusts can be excellent vehicles for donations, retirement funds and tax relief. If you are considering a CRT, don’t hesitate to speak to an estate planning attorney who knows the ins and outs of the process.