What is a Charitable Remainder Trust
A charity remainder trust in California helps you support a philanthropic cause while retaining income for yourself and your loved ones. Call Hess-Verdon trust attorney at (949) 706 -7300.
Taxes and philanthropy are like yin and yang, and a CRT makes these two work together in harmony for your good. When you own a Charity Remainder Trust, you get a steady income stream from your assets without taxes, and the rest go to a charity of your choice. Let’s learn more.
What is a charitable remainder trust?
A CRT is a trust with provisions to generate income for you, the donor, or your named income beneficiaries. After its term elapses, the remaining assets go to your chosen charity organization – The Red Cross, university, hospital, and so forth. This proven philanthropy estate planning strategy empowers you to give more in terms of philanthropy as you earn an income from the same assets. The payment you get from a CRT is virtually tax-free.
How does a charitable remainder trust work?
The central concept of charitable remainder trusts is reducing taxes. That is attainable first by gifting assets into the trust then letting it pay you or a chosen income beneficiary for a defined period. When this time frame elapses, the remaining assets get transferred to the charitable beneficiaries.
The CRT is irrevocable. In essence, once set up, a charitable remainder trust cannot be changed or terminated except with the beneficiaries’ permission. As the grantor or trustor, you effectively remove assets from your estate once you transfer them into the CRT.
The non-charitable beneficiary of a CRT can be you or someone else you choose. They receive income from the trust typically for 20 years or until after death. After that, all the remaining assets go to the named charitable organization.
- Make a tax-deductible gift.
After you set up a CRT, you can fund it with cash, real estate, stocks, and other assets. These donations are all eligible for a partial income tax deduction, a discount that depends on the structure of charitable remainder trust you choose, IRS trust-based interest rates, and estimated income payments.
- Earn income from the CRT
The income beneficiaries of the trust start to receive income from this trust either annually or quarterly. The IRS stipulates that the yearly CRT income should be between 5 % and 50 % of all trust assets.
- Distributions to charity
At the end of the CRT term or after the last non-charitable beneficiary dies, the remaining CRT principle and earnings get distributed to charitable beneficiaries.
The Benefits of a Charitable Remainder Trust
After you set up a charitable remainder trust, there are two benefits for you. First, you get to earn regular income from the trust assets, and second, you reduce taxes on this income and estate taxes on the assets when you die. In other words, the CRT:
· Reduces income taxes through an income tax deduction
· Converts all present into lifetime income
· Eliminates capital gains when assets are eventually liquidated
· Benefits a charity
· Protects assets from creditors
· Assets can grow in the trust
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Hess-Verdon is in Newport Beach. We have 30 years’ experience in estate planning law. We have helped many clients protect their estate, grow their estate, and pass it down to their loved ones through various legal instruments.
Types of CRTs
Charity remainder-annuity trusts (CRATs): The income beneficiaries are guaranteed a fixed amount from all assets in the trust as yearly income for their lifetime or 20 years. With a CRAT, the income earned from the trust is constant and immune to fluctuations in the economy or changes due to the performance of the investments.
Charitable remainder-unitrusts (CRUTs): If the CRT is created as CRUT, the income beneficiaries receive a specific percentage (at least 5 %) of the assets in the trust. The amount received by the grantor or named beneficiaries during their lifetime varies based on the performance of the trust’s assets.
Charitable remainder trust distribution rules
· Payments must be set as a fixed annual amount or as a fixed percentage of the yearly trust value as in a CRUT.
· The CRT can have inflation adjustments for payments, but this benefit eliminates charitable deductions
· The IRS rules demand that CRT payments be between 5-50% of the trust’s assets
· As the grantor, you receive an instant income tax deduction that is equal to the current value of the projected remainder interest that goes to the charity
Key considerations for a CRAT:
· The Charitable Remainder Annuity Trust or CRAT pays a fixed income stream
· The income is a percentage of the CRAT asset’s market value
· This payment doesn’t change in the term of the trust; thus, the term annuity
· If you fund the CRAT with $2 million and you choose a 5% annuity payment, this trust will pay you a fixed $100,000 every year
· The CRAT payments rarely surpass 15%
· You cannot add new assets to the CRAT after you create it
Key considerations for a CRUT:
· The payments are a fixed ratio of the dynamic market value of the assets
· The yearly income stream fluctuates as the current value of the assets change
· You receive more pay when the assets grow and less money when the CRUT investments dive
· If you funded the CRUT with $2 million, and you choose 10 % as the payout, in the first ear, you would get $200K
· If in the second year the CRUT assets appreciate to $3 million, the payout will be $300K
· If in the fourth-year assets fair market value dropped to $1million, the payout will be $100K
The CRT is good for you if you wish to preserve the value of your appreciated assets. This trust empowers you to turn long-term trusts into an income-generating property. When the trust sells the assets that are put into it, the sale is exempt from taxes. By avoiding capital gains taxes, more money goes to the income and charitable beneficiaries.
The CRT investments are exempt from tax. That makes the CRT a worthwhile vehicle for asset diversification. You can also use it to take care of your hairs for their entire life -it helps you prevent the risk of spendthrift heirs running down your estate. Contact Hess-Verdon trust attorney for help with all issues relating to a charity remainder trust. Call 949) 706 -7300.
- Charitable Remainder Trust (CRT)
- Grantor Retained Annuity Trust (GRAT)
- Qualified Personal Residence Trust (QTIP)
- Learn more on estate planning.
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