Trusts have many functions, and there are numerous types of trusts. Many are useful in estate planning, and it’s always wise to seek professional assistance when considering whether and what variety of trust to establish to best pursue your goals.
One multi-functional trust type is the charitable remainder trust, which investors may create in an effort to achieve the following:
- Designate assets and income for heirs
- Maintain income for the grantors’ lifetime use
- Decrease taxes
- Support charities
The primary intent of a charitable remainder trust is to initially provide income for either the trustor (the person who establishes the account) or a beneficiary for a specific time, and then bequeath the assets or remaining funds to a selected nonprofit organization. The length of the income distribution can either be no more than twenty years or the beneficiary’s lifetime. The trustor sets the schedule and amount of payments, but the percentage of assets paid out must fall between five and fifty percent of the trust’s value.
Two Types of the Charitable Remainder Trusts
A charitable remainder trust can be an annuity trust, in which case the trustor creates it with a single contribution and no additional infusions. The amount of the annuities back to the grantor is set. Alternatively, it can be a unitrust, in which the trustor can make multiple deposits. The income that goes back to the trustor (or to beneficiaries) is set as a percentage but can be reviewed and adjusted annually.
Why Use a Charitable Remainder Trust?
An investor with appreciated assets may want to consider a charitable remainder trust for several reasons. First, setting up the trust removes the assets from the grantor’s estate, which provides for a charitable income tax deduction. Note that contributions to a charitable remainder trust are irrevocable, which allows for the tax deduction. However, since the grantor or a designated beneficiary will receive income from the trust for a specific time before the nonprofit receives the balance, the grantor can deduct the amount the charity should receive after the conclusion of the income distribution period. The taxpayer can spread that deduction over five years.
Second, the trustee can sell the assets without incurring capital gains taxes on the appreciated assets in the trust. That action may provide higher income for the trustor during the annuity period in some circumstances.
Can You Change the Beneficiary?
The charitable remainder trust beneficiary must be a nonprofit per Internal Revenue Code 170(c) stipulations, including a charity, private foundation, religious organization, or donor advised fund. The trustor selects the charity when establishing the trust. However, suppose they need to change the designation later. In that case, it's wise to seek professional help or have the action taken by an independent trustee to avoid the risk of assets in the trust being returned to the estate for tax consideration.
However, when the trustor is creating the charitable remainder trust, if they anticipate needing to make future changes to the beneficiary, they may want to consider using a donor-advised fund as the charitable beneficiary rather than naming specific organizations. That structure would allow for the recipient nonprofits to be changed at any time without using an independent trustee or risking the integrity of the trust’s taxable status.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.