Leaving a financial legacy can take on many different forms. Creating a charitable remainder trust to benefit your favorite foundation, museum, community group, university or nonprofit organization is an avenue to consider when deciding how to commemorate your financial achievements and cement a fiscal legacy.
Charitable remainder trusts also can provide important tax exemptions that will help preserve the full value of highly appreciated assets. In this article we’ll take a look at how charitable remainder trusts work and whether or not they are revocable.
What Is a Charitable Remainder Trust?
Charitable remainder trusts are considered “split-interest” trusts – the trust beneficiary (grantee) as well as the grantor or trustor can receive regular income disbursements over a set period of time, although the timeline for dispensing any income generated from the trust cannot exceed a period of 20 years. Payments can be set up for monthly, quarterly, annual or semi-annual disbursements. At the end of a time frame that’s determined when the trust is established, or upon the death of the grantor, the assets held under trust are donated to the charitable beneficiaries who were named as grantees.
Tax deductions are one of the primary benefits of establishing a charitable remainder trust. The trustor gets a partial deduction on assets that are donated to the trust. These assets can be real estate, cash, stocks, business interests, and private equity. Tax deductions are calculated based on the terms of the trust, amount of projected payments to beneficiaries, interest rates and other factors.
Additionally, any assets held under trust can be sold tax-free once they are fully owned by the grantee. This exemption helps preserve the full value of highly appreciated assets, since the charitable beneficiary won’t have to pay capital gains taxes on those assets when the trust terms are fully realized and the grantee divests the assets.
Annuity and unitrusts are the two primary kinds of charitable remainder trusts. The first distributes a fixed amount annually, and the grantor cannot make any additional contributions once the trust is established. The latter distributes income based on a fixed percentage of the value of assets held under trust, which is revalued each year. The grantor can make additional contributions to a charitable remainder unitrust.
Are Charitable Remainder Trusts Revocable?
One important aspect of charitable remainder trusts to keep in mind is that they are irrevocable. That means you cannot change beneficiaries once the trust is established. Additionally, the grantor no longer has control of the assets placed in trust – the trust is the legal owner of the assets and is recognized as its own separate tax entity. The manager of the trust is responsible for paying all taxes incurred by the trust.
The Bottom Line
Establishing a charitable remainder trust can be beneficial for preserving wealth, generating recurring income and providing important tax deductions. They are irrevocable, though, so you cannot alter the terms of the trust or change the charitable beneficiary once the trust documents are signed.
Consult with an experienced estate planning attorney to learn more about how a charitable remainder trust can help establish a financial legacy and meet your philanthropic goals.