How to Set Up a Charitable Remainder Trust

How to Set Up a Charitable Remainder Trust

Posted by Clay Schmidt on Jan 18, 2022


Estate planning can take on many different forms. A tax-exempt charitable remainder trust is one tool available when planning your estate that you can use to draw regular income, reduce tax liability, and distribute income to your beneficiaries and predetermined charities of your choice.

Charitable remainder trusts can be important to investors who want to leave a financial legacy after they pass. They also can be valuable tools for investors who have highly appreciated portfolios with substantial assets because those assets can be contributed to the charitable trust and then sold by the trustee or charity with no capital gains tax liability. This transfer also removes assets from your personal estate, which eliminates any estate taxes on those assets when you pass, and you’ll also receive a charitable income deduction on your taxes.

Setting up an irrevocable charitable remainder trust (CRT) is pretty straightforward. Below we’ll cover the steps necessary to establish this type of trust, as well as highlight some key benefits and potential drawbacks of CRTs.

Establishing a Charitable Remainder Trust 

If you are considering setting up a CRT, you’ll want to engage the services of a trust attorney with extensive experience in estate planning to ensure that all the paperwork required to set up and maintain the trust is completed properly and the trust is legal and valid.

An estate planning professional will first ensure the charity or charities that will receive the remainder of your trust are tax-exempt organizations recognized by the IRS. The grantor also will complete the paperwork necessary to transfer your desired assets into the trust. Once those steps are complete, the charity you’ve selected acts as the trustee and determines the best course of action for those assets.

The trustee can provide you or a beneficiary of your choice with regular income generated from assets held in trust for a specified period of time up to 20 years – details that are included in the trust paperwork set up by the grantor. Beneficiaries can receive income as a fixed annuity or as a percentage of assets held in trust. The fixed annuity is irrevocable, so it can’t be changed, but percentage payments can be adjusted downward if necessary based on the performance of assets held under trust.

Once the timeline specified in the trust expires, the charity receives the remainder of any funds and assumes ownership of all assets held under trust. 

The Bottom Line

Charitable remainder trusts can be a valuable estate planning strategy, especially for high-net-worth individuals whose portfolios include significantly appreciated assets. This type of trust can provide important tax exemptions for the donor, the trustee, and you or your heirs. They also can lower the total net worth of your estate, which reduces the impact of estate taxes and preserves the value of highly appreciated assets such as income-producing commercial real estate.

Charitable remainder trusts can be complex to establish. A qualified estate planning attorney can help guide you through the process and also determine which type of charitable trust works best for your estate and financial legacy goals.

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. It should also not be construed as advice meeting the particular investment needs of any investor. 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. Costs associated with a 1031 transaction may impact investor’s returns and may outweigh the tax benefits. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities. All investments have an inherent level of risk. The value of your investment will fluctuate with the value of the underlying investments. You could receive back less than you initially invested and there is no guarantee that you will receive any income.

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