A Charitable Remainder Trust is another tool in estate planning that allows gifts to charity while reducing the tax burden on the giver. Lately, Charitable Remainder Trusts have gained popularity, but it is important to understand what they are, what they do, and when they should be used. With the current estate tax exemptions, most of the population does not need a Charitable Remainder Trust to avoid tax consequences.
- Irrevocable. A Charitable Remainder trust is an irrevocable trust which means once you create and fund it, you cannot change it. While you may be set on giving to a specific charity today, be sure it is a charity you always desire to give to, regardless of change in ideology, changes in leadership, or policy. Once you set the charity, there is no going back.
- Income. You create the trust and choose the charity, but you also get to choose the person who receives the income from the trust (the beneficiary). The beneficiary can get income for a set period, up to 20 years. While you can also put real property into a charitable remainder trust, there must be assets that generate income. If your Charitable Remainder Trust is an annuity trust, the annuity must pay out at least 5%, but not more than 50%, of the trust’s assets.
- Charity. At the end of the term, the charity you designated gets all the remaining funds. This allows you to contribute to a philanthropic area you are passionate about rather than giving the money to the government in taxes.
- Tax Reduction. The biggest benefit of a Charitable Remainder Trust is the tax reduction. Upon the funding of the trust, you get a partial tax deduction on your income taxes. The amount of the deduction depends on the term of the trust, the income payments, and IRS tables projecting growth. The amount put into the trust is also removed from your estate and therefore reduces your overall taxable estate. For individuals (or couples) who are well over the exemption amount (currently $24,120,000), and who are willing to part with a significant portion of their wealth now, a Charitable Remainder Trust may be a useful tool.
As with any irrevocable trust, Charitable Remainder Trusts should be considered at length and involve the input of your financial planner and estate planner. Understanding where your money is going and what your financial outlook will be is vital to being comfortable with a long-term irrevocable trust. See our blog on Donor Advised Funds for an alternate way to give to charity and to reduce your tax bill while remaining in control. At Grissom Law, we take a holistic approach to your financial plan and estate plan. Give us a call to see if a Charitable Remainder Trust is a good fit for your future.
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