If you have a significant amount of highly appreciated assets (stock, real estate, or other property), a charitable remainder trust can be an excellent way to convert those assets into income and save capital gains taxes.
Creating a charitable remainder trust requires careful planning and legal expertise. An Edelman Financial Engines advisor can help you weigh the pros and cons of a charitable remainder trust as part of your overall estate plan.
Donation of Property
The donation of property to a charitable remainder trust can be a highly effective tax-saving strategy for both the donor and his or her beneficiaries. This type of trust creates an income stream for the beneficiary and can provide an estate tax deduction.
Charitable remainder trusts can also be established in conjunction with other estate planning techniques, such as retained life estates and bequests. However, it is important to note that the charitable deduction for a gift of real property may be reduced if there is debt on the property.
For this reason, the transfer of indebted properties requires careful consideration to ensure that the charity receives title and does not contractually obligate itself to pay indebtedness to a lender. Furthermore, the existence of debt on the donated property should be disclosed to the charity before it accepts the donation. This information is often required by state law. A donor should consult an attorney who is experienced in this area prior to making a donation.
Designation of Beneficiary
The first step in establishing a charitable remainder trust is to designate a beneficiary. The beneficiary can be you, your spouse or another individual.
This beneficiary may receive income from the trust for your life, their lifetime or a set number of years. The trust document should specify how long the income will last and what will happen to the property after the grantor’s death.
Your advisors can help you choose the right beneficiary based on your specific goals and objectives.
Ideally, you can fund a charitable remainder trust with appreciated assets that have greatly increased in value since you purchased them. This allows you to generate a high current income yield without paying capital gains tax.
Income Distribution
A charitable remainder trust (CRT) is a giving vehicle that allows you to receive an immediate charitable income tax deduction while providing regular income for you or another person. CRTs can be set up by will or for estate planning purposes, or you can establish one during your lifetime.
Depending on the type of CRT, income can be distributed to you or someone else for life or a term of 20 years. It can also be a fixed percentage of the trust’s value revalued annually.
A CRAT is a popular planned gift tool during times of low equity values and high interest rates because it can provide a high income payout for many years, while deferring capital gains taxes on the appreciation of assets transferred to the trust. The income payout can be adjusted to suit a donor’s financial goals, and the trustee can invest the trust’s assets in ways that will satisfy a variety of investment objectives.
Tax Benefits
A charitable remainder trust (CRT) offers several tax benefits to the donor and beneficiary. In addition to generating income, it can allow the donor to reduce current taxes while avoiding estate tax at death.
With a CRT, you can make gifts of cash, stocks, property, real estate, private business interests and other assets to a charity, and you can receive an immediate income tax deduction for the value of the gift. Then, the trustee will sell the assets and reinvest the proceeds to generate income for the charity.
You can choose to have a charitable remainder annuity trust pay you a fixed annual sum of money, or a charitable remainder unitrust pay you a percentage of the value of the trust each year. Regardless of which type you establish, all payments must equal at least 5% and no more than 50% of the fair market value of the trust’s assets as determined annually. They must be reported on Schedule K-1 (Form 1041), Beneficiary’s Share of Income, Deductions and Credits.
