Properly planning and structuring of charitable contributions and gifts can be a huge part of the overall estate plan. There are good and bad ways to give. Ensure that your gift is properly funded and distributed per your wishes by planning ahead of time. This planning may include using charitable remainder trusts.
Charitable Remainder Trust Basics
This estate planning tool is often considered a “split interest trust” which allows both the owner and the charity to benefit. Once a charitable remainder trust (CRT) is drafted and assets are transferred into the trust, the owner will begin receiving income for life from the trust. Upon the death of the owner of the CRT, the remaining trust property passes directly to the charity.
Properly structured charitable remainder trusts allow the owner to establish a guaranteed income stream while planning a charitable gift for the future. Improper trusts are oftentimes underfunded. CRTs which are unable to provide for the designated lifetime income or which will be depleted prior to making a charitable donations are considered defective. These defective trusts can prevent the owner’s wishes from being carried out and may result in a loss of income, gift and estate tax charitable deductions.
Tax Benefits
CRTs allow the owner to take a charitable deduction on the present value of the assets that will pass to the charity at their death. This current income tax deduction can be used to offset other forms of income and can put the owner in a better tax situation.
CRT owners are also able to take advantage of tax-free asset conversion strategies. The owner is also exempt from having to pay capital gains tax. By using the CRT to sell highly appreciated assets without having to pay capital gains or ordinary income tax, the lifetime income stream provided to the owner can be potentially greater.
An Overall Gifting Strategy
Charitable remainder trusts can be a perfect way to structure a donation. Charitable remainder trusts come in many forms, from charitable remainder annuity trusts to charitable remainder unitrusts. Charitable remainder annuity trusts are structured to ensure the owner is paid an annual fixed dollar amount. Charitable Remainder Unitrusts pay an annual fixed percentage of the value of the trust assets; this amount may vary based on the performance and returns of the trust assets.