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What’s Charitable Remainder Trust, And Is It Right for Me?

Ever imagined generating income while giving to charity? A Charitable Remainder Trust (CRT) is a type of tax-free trust that generates income for you or other beneficiaries or heirs (if any) and donates the remainder to your favorite charity organization(s). You may think of it as a split-interest system that allows you as a donor to contribute to a charitable cause and qualify for a partial tax deduction, after which you donate the remainder.

Charitable trusts are irrevocable trusts, meaning that their terms can’t be modified in any form or terminated without the beneficiary’s permission. In other words, when you give ownership of your assets to the trust, you legally lose all ownership rights to the assets. Some great attributes of irrevocable trusts are minimizing property taxes, accessing government benefits, and protecting assets. Revocable trusts, on the other hand, allow grantors to modify trusts. However, they may lose some benefits like credit protection.

How Do Charitable Remainder Trusts Work?

Charitable trusts are primarily meant to reduce taxes and yield income annually, allowing you to contribute to the trust. At the same time, you earn income depending on the value of the CRT assets that you’d hand over to your charity. It allows you to name yourself or an heir to receive income for a term of (e.g., 10 to 20) years or even for life.

Essentially, you donate your assets to a fund and receive a percentage income from it for an agreed period. And on the expiry of the agreed period, whatever is left is given to the beneficiary charities. That sounds like a good blend of philanthropy and earning, combining seamlessly in a reliable system, doesn’t it?

A Charitable trust’s payout percentage must be at least 5% and can increase to a maximum of 50%, provided the charitable deduction doesn’t go below 10% of the transferred amount. As a funder of a charitable remainder trust, you receive a typical charitable income tax deduction of 30% to 40% of the transferred amount, according to Harvard Law School. Here’s a use case of charitable trusts to bring the point home.

An Example case of Charitable Trusts

Mr. and Mrs. Brown are in their late 50s and own a house in Los Angeles. They are retired, living in Spain, and have other properties, but they can’t sustain this LA  property maintenance as it’s expensive and time-intensive.

The house’s fair market value is $700,000 and is without debt. The Browns had considered selling off the house and taking the profit as opposed to its tasking maintenance. But their basis will be $200,000, aside from major capital gain taxes they’d incur in the sale.

While they’re in a twist,  their friends, the Hawkings, visit and tell them they can convert their LA building to a lifelong income stream while pursuing a philanthropic cause like this. So,

  • The Browns donate their house to a charitable remainder trust
  • The trustee sells the house tax-free. (Remember that charitable remainder trusts are tax-exempt).
  • The trustee reinvests the funds realized.
  • The Browns get a $180,000 charitable income tax deduction
  • After the house sale, the Browns get an annual income of 7 percent of the fair market value of the trust assets (as revalued annually). In essence, they receive $49,000 for the first year.

Types of Charitable Remainder Trusts

Two major types of charitable remainder trusts exist. They are;

#1. Charitable Remainder Annuity Trusts (CRATs)

Charitable remainder annuity trusts are inflexible, being that they distribute a fixed amount of money annually and don’t allow any extra contributions. They often don’t work with percentages. So, in the case of Mr and Mrs brown above, they’d receive $49,000 and not 7%, not minding the performance of the trustee’s investment.

#2. Charitable Remainder Unitrusts (CRUTs)

CRUTs function a little differently from CRATs, although they share the same underlying principle. Charity remainder unitrusts distribute a fixed percentage of the fair market value of the remaining trust funds. The interesting part is that the fair market value is revalued annually, which means you receive a greater percentage of the asset value increases and vice-versa.

Do I Need a Charitable Remainder Trust?

You may want to consider a charitable remainder trust if;

  • You need an immediate charitable income tax deduction for an appreciating property
  • You seek to provide a post-retirement or lifelong income stream for you or some other person
  • You want to give to your favorite charities
  • You want to establish a source of fund inflow by will for your heirs using your property.
  • You want to be protected against creditors for the charitable remainder asset(s)

What About Your Love Ones?

By providing a source of income for you for a given number of years, or for life, a charity remainder trust may sustain you till you die. But what happens to your next of kin or heir after you’re gone and the charity takes over your asset? Do they just walk away with nothing? Not to worry, there’s a way out! You can pre-load a life insurance of say $1 million deducted from the annuity. As such, your next of kin gets a whopping $1 million when you die instead of walking away with nothing.

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Conclusion

Charitable remainder trusts make it possible to earn while giving to charity. It is a transparent system that favors you to make the most out of your assets―property, cash, artworks, or stock shares. You can give back to society while having constant cash inflow to depend on, whether you’re tending to other businesses, enjoying retirement, or leaving something by will for your heirs.