What You Need to Know About Charitable Remainder Trusts

January 15, 2015

Putting assets in a charitable remainder trust allows them to grow for a charity’s future use.If you’re like most people, you probably wish you could give more to the charities that are close to your heart. But most of us have limited resources, and the donations you’re able to make today may seem to just not go as far as you like, especially considering all the need there is the world.

But what if there was a way to give a substantial portion of your wealth to charity while still drawing a yearly income that allowed you to maintain your current lifestyle? Well, there is. It’s called a charitable remainder trust.  

How Charitable Remainder Trusts Work 

In simplest terms, a charitable remainder trust (CRT) allows you to make a large tax-deductible charitable donation today while still enjoying income for years to come. Here’s how it works: You set up the trust, name a tax-exempt charity as the trust’s beneficiary, and fund it with a portion of your assets. The charity or a trustee then controls the assets, but you will receive a specified annual payout for a certain number of years. This payout may be fixed amount (say, $50,000 a year), in which case it’s called a charitable remainder annuity trust (CRAT). Or, the payout may be a percentage of the trust’s total assets, which is known as a charitable remainder unitrust (CRUT). When the term ends (or when you die if you’ve selected a lifetime annuity option), the charity receives all the assets in the trust. 

Charitable Remainder Trusts: Pros  

For people who have significant assets and a desire to leave a substantial legacy, CRTs have a number of advantages:

  • Leave a substantial legacy without sacrificing current income: Not all of us can afford to make large outright cash gifts to charity today. A CRT is a way to turn your wealth into a meaningful legacy without having to sacrifice your current economic security.

  • Immediate tax deduction: The money you use to fund the trust counts as a tax-deductible charitable donation in the year the trust is established.

  • Defer and possibly eliminate capital gains tax: People often fund CRTs with appreciated property, like stocks, which can help them defer taxes on capital gains. Say you have stock that has appreciated significantly and would trigger capital gains tax if you were to sell it. If you donate that stock to a CRT instead, you don’t pay capital gains tax right away. Nor does your chosen charity have to pay capital gains taxes on those assets—a win-win for everyone involved.

  • Opportunity to minimize estate tax: If you have a large estate, donating a portion of your assets to a charitable remainder trust takes those assets out of your estate. That could reduce the amount of your assets that are subject to estate tax after you die. 

Charitable Remainder Trusts: Cons 

CRTs have a number of advantages, but they aren’t for everyone. Below are a few possible disadvantages of setting up a charitable remainder trust:

  • Irrevocable: By far the biggest disadvantage of a CRT is that it is irrevocable. In other words, once you set up your CRT, you can’t get that money back—it belongs, in essence, to the charity, even if you are receiving payments from the trust.

  • Locked into income decisions: Once you set up a trust and select your payout option (either a fixed amount or certain percentage) you are locked in to that decision. If you choose the fixed payment, you won’t see any benefit if the market performs well in certain years, and you won’t be able to increase your income if you suddenly need more money. If you choose the percentage payment, your income will rise and fall from year to year, which may make planning more difficult.

  • Less to leave to family: Putting a substantial chunk of your assets in a charitable remainder trust means that you have less to leave for your family after your death. To make up for these “lost” assets, some people may choose to purchase life insurance, naming their heirs as their beneficiary. This allows them to leave a significant amount to a charity without disinheriting their children or other loved ones. 

An Option Worth Considering 

Charitable remainder trusts aren’t the easiest way to leave money to a charity. They are more complicated to set up and administer than some other charitable giving strategies, like simple bequests in a will, and they have some other potential disadvantages. But for many people, CRTs are a way to balance a desire to share their wealth with their need for income today.

If you’re interested in learning more about CRTs and whether they might be the right way for you to pursue your philanthropic goals, give us a call. We can explain more about how charitable remainder trusts work and discuss whether this is a giving strategy that makes sense for you.