Estate planning is a multi-faceted and intricate process, and each family will have different needs and considerations when formulating the most prudent estate plan. For the purposes of this article, we will be examining the charitable remainder trust, one of the estate planning tools available to you if you plan on incorporating charitable donations into your estate plan. A charitable remainder trust comes with tax and philanthropic benefits with the added benefit of generating income for the donor to the trust. However, there are certain disadvantages with a charitable remainder trust, namely that it and any other charitable trust you set up is an irrevocable trust, meaning that you lose control of the assets you put into it. When considering a charitable remainder trust as part of your estate plan, it is important to consult with an experienced estate planning lawyer who will evaluate your assets, determine whether a charitable trust makes sense for you, and then create the most prudent trust for you that will guarantee \ a degree of financial security and knowledge that your legacy will be a philanthropic one.
What is a Charitable Remainder Trust?
A charitable remainder trust is an irrevocable trust that allows a donor to make donations to the charity or charities of their choice as part of their estate plan. The two main types of charitable remainder trusts are:
- Charitable remainder annuity trust (CRAT)- This type of trust pays the donor a fixed annuity for the remainder of their life or for a specified time. The income payment is a fixed percentage of the initial value of the assets placed into the trust and is determined at the time the trust is created. The fixed annuity must be between 5% and 50% of the initial value.
- Charitable remainder unitrust (CRUT)- This type of trust pays the donor a fixed percentage of the fair market value of the assets, adjusted annually, for the remainder of their life or for a specified time. The fixed percentage is determined at the time the trust is created, and must be between 5% and 50% of the assets in the trust.
Upon moving assets into both types of charitable remainder trusts, the donor receives an immediate income tax deduction based on the present value of the charitable remainder issue that will, at the end of the trust’s term, go to the designated charity or charities. In the case of each trust, once the donor dies or the specified term of the trust ends, the remaining assets are distributed to the designated charitable organization(s) based on the value of the assets therein at that time.
How To Set Up A Charitable Remainder Trust
- Create a tax-exempt irrevocable trust for the assets you intend to donate. It is important to note that upon creating an irrevocable trust, the assets you place into it are no longer yours and the terms of the irrevocable trust, for the most part, cannot be changed.
- Select a trustee to manage the trust. You could designate yourself, but it is recommended you appoint someone with experience managing charitable remainder trusts to ensure the assets are managed correctly. Trustees must comply with the Uniform Prudent Investor Act, a federal law which establishes guidelines for trustees to follow when investing trust assets.
- Determine the terms of the trust. This includes the duration of the trust and the fixed payment percentage.
- Choose the charitable organization(s) you would like to be beneficiaries upon the termination of the trust. The charitable organization(s) must be approved by the IRS.
- Transfer assets into the trust. Upon transferring assets into the trust, they are no longer legally yours and are under the purview of the designated trustee. Donors receive an immediate income tax deduction. Trustees may then sell non-profit generating assets and reinvest the proceeds on behalf of the trust; in this case, donors do not immediately have to pay capital gains taxes.
Advantages of a Charitable Remainder Trust
- Partial tax deduction upon placing assets into the trust.
- No capital gains tax paid upon the sale of assets in the trust.
- The choice of charitable organization designated as beneficiary is entirely yours.
- Donated assets are no longer part of your estate, which can, for example, help you to qualify for Medicaid or other programs with income cut-offs.
- You receive a consistent income stream.
Disadvantages of a Charitable Remainder Trust
- Charitable remainder trusts are irrevocable, making them very difficult to change.
- Makes sense largely for substantial asset donations.
- Legally, assets in the trust are administered by the trustee and are no longer yours to control.
- Assets in the trust go to the charitable beneficiaries upon terminations, not your heirs.
- Income from a charitable remainder trust can be taxed as regular income.
- Tax deductions might not be claimable immediately after donation and instead spread over a five year period.
In the realm of estate planning, a charitable remainder trust is one of the many tools at your disposal when creating the perfect plan to give you and your family peace of mind. If you feel charitable donations are an important part of the legacy you want to leave, they are a good option, especially if you have non-profit generating assets or have estate or capital gains tax worries. It is important, however, to understand the advantages and disadvantages of such a trust, as it is with all irrevocable trusts. The assets therein are no longer yours and because assets go to the charitable beneficiaries, they can no longer be inherited by your heirs. To understand charitable remainder trusts, irrevocable trusts, and a host of other estate planning tools, it is important to have an experienced estate planning and trust building attorney guiding you. To schedule a consultation, contact the Law Office of Inna Fershteyn at (718) 333-2394.