You’ve worked hard to build your business into what it is today, and now you’re reaping the rewards. Maybe you’re considering sharing the wealth with a favorite charity or two. One way to do that is by creating a charitable remainder trust.
Charitable remainder trusts offer benefits for your business, your family, and your charity of choice. Read on to discover more about charitable remainder trusts and whether creating one makes sense for you.
What Is a Charitable Remainder Trust?
A charitable remainder trust, also called a CRT, is a type of irrevocable trust that provides income to the trust creator (or settlor) and designated income beneficiary(ies) while they’re still alive. After the death of the last income beneficiary, the assets in the trust go to the designated charity or charities.
Types of Charitable Remainder Trusts
There are two types of charitable remainder trusts:
- Charitable Remainder Annuity Trust (CRAT): A CRAT provides a fixed payment to the income beneficiary(ies) of the trust every year regardless of the principal in the trust.
- Charitable Remainder Unitrust (CRUT): With a CRUT, the annual income payment is calculated as a percentage of donated assets. This payment is recalculated annually based on the trust principal value, which has to be determined annually.
Another type of charitable trust is the charitable lead trust. Charitable lead trusts pay charities while the trust creator is alive rather than after their death. The remaining principal is paid to beneficiaries after the trust creator (settlor) dies. These are outside the scope of this post.
How Do Charitable Remainder Trusts Work?
Here’s the basic gist of how charitable remainder trusts work:
- First, you’ll need to create the trust with the help of an estate planning attorney. Note that the trust must be irrevocable (more on what that means below).
- Once you’ve created the trust, you’ll transfer assets into it. You can put any type of assets into your trust, but ideally, they should be assets that have appreciated and will continue to appreciate in value over time. Such assets may include real estate, such as commercial or residential rental property, and stocks.
- The trustee pays a set sum to the income beneficiary(ies) until the last of them dies. Some trusts only pay for a specific period of time, such as up to 20 years.
- The trustee will file annual, fiduciary income tax returns.
- When the last income beneficiary dies, the remaining assets in the trust pass to the charity or charities.
Benefits of a Charitable Remainder Trust
One of the biggest perks of charitable remainder trusts is that they can provide a lifetime income stream for you and your designated lifetime beneficiaries..
Another major benefit is that you can prevent your family from having to pay estate taxes on the assets after your death. Once you’ve transferred assets into the trust, they belong to the trust and are no longer a part of your taxable estate; however, you will report the gift and allocate a portion of your lifetime exemption from estate and gift tax to the value of the gift, but your estate will save estate and gift tax on the appreciation in value from the date of the gift to your date of death.
Charitable remainder trusts are an option for creative planning with appreciated assets, achieving a current charitable income tax deduction without recognizing capital gains tax.
Are There Any Drawbacks or Limitations?
The largest drawback of charitable remainder trusts is that they are irrevocable. Irrevocability is a double-edged sword: It can protect your assets from your beneficiaries’ creditors and lower estate taxes, but you will give up significant control of the asset and the trust, which is why experienced legal counsel is critical at the outset.
Charitable remainder trusts, being irrevocable, require their own tax identification number and must file their own tax returns. Income beneficiaries must report their income payments and pay tax on those payments.
Is a Charitable Remainder Trust Right for You?
As mentioned above, charitable remainder trusts are ideal for business owners who:
- Have assets that have appreciated and will continue to appreciate
- Want to make significantcontributions to one or more charities
- Want to retain a lifetime income stream
Disclaimer: This blog post provides general information and does not constitute legal or tax advice. It is essential to consult with an attorney and tax advisor to determine if a CRT is suitable for your specific circumstances..
Contact an Estate Planning Lawyer To Learn More
Charitable remainder trusts offer impressive benefits, but they’re not right for every business owner. Not sure whether this type of trust makes sense for you? Reach out to Wilson Ratledge PLLC. Our attorneys will go over the perks and limitations of charitable remainder trusts to help you decide.
For a consultation, call Wilson Ratledge PLLC at 919-787-7711.