A Charitable Remainder Trust (CRT) is a trust set up by an individual. Typically, the intention behind the trust is to reduce the grantor’s taxable income by making payments to the beneficiaries while the trust is extant. Then the grantor gifts the remainder of the assets to a designated charity when the trust ends.
To secure the income tax benefits of a Charitable Remainder Trust, it must be irrevocable. This means that once the trust is set up, the grantor may not change it without the express permission of all the beneficiaries.
Why Set Up a Charitable Remainder Trust?
Charitable Remainder Trusts are a very effective tool as they allow the grantor to receive income from the assets and benefit from large income tax deductions. CRTs are sometimes known as split-interest trusts because the donor can receive a tax deduction and gift assets.
How Do You Set Up a Charitable Remainder Trust?
Creating a Charitable Remainder Trust involves a similar process as setting up any other kind of trust. There needs to be a trust document that explains the purpose and details of the trust. The deed must name various parties such as the trustee, the beneficiaries entitled to an income, and the remainder charitable beneficiary.
The trust deed must specify a period during which the beneficiaries will receive an income. The rules around the specification of the period are reasonably flexible. You can choose a fixed term such as a set period of years or select your lifetime or the lifetime of your spouse. Depending on when the trust is created, the lifetime of the grantor may mean that the trust is in existence for a significant number of years.
What Are the Benefits of a Charitable Remainder Trust?
The major benefits of a Charitable Remainder Trust are the tax advantages. The grantor can avoid or reduce estate taxes because the assets placed in the trust are no longer deemed to be part of the grantor’s taxable estate.
Capital Gains Tax may be deferred until that amount is distributed to the beneficiary as income. The grantor can place an asset that is likely to appreciate greatly in value into the trust. If the trustee later sells this asset at a fair market value, the capital gains tax attributable to the sale can be spread out over many years because the beneficiary receives the income yearly. The grantor may also receive charitable income tax deductions for the first year that the trust exists.
Income from the trust is not tax-free. The beneficiaries must pay income tax on any amounts they receive during the tax year. However, the charity receiving the remainder may be tax-exempt.
Charitable Remainder Trusts Last for a Specified Time
The lifetime of the trust can be the same as the lifetime of the grantor. The grantor may elect to choose the lifetime of their spouse or another beneficiary. An alternative is to select a specified number of years. If the grantor chooses to specify a fixed timeframe, it may not exceed a period of 20 years.
Once the Charitable Remainder Trust comes to an end, any remaining assets go to the nominated charity.
