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Pros and Cons of Charitable Remainder Trust
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The Pros and Cons of a Charitable Remainder Trust

Charitable remainder trusts (CRTs) serve a variety of functions. You can use the CRT as a stream of income if you (the trustor) or a beneficiary choose to contribute assets. The remainder funds go to a charity you choose. To form, leverage, or properly manage a CRT for estate planning, call California trust attorney Hess-Verdon at (949) 706-7300.

Charitable Trust

The CRT method is popular among estate planners. Charity and not-for-profit organizations have benefited from this type of trust since 1969. A CRT can also offer you and your family the opportunity to retain an interest income while donating to a charitable cause.

You can use a CRT to increase your giving to a worthwhile charity while reducing estate taxes, eliminating capital gains, and claiming income tax deductions. 

You or your family (income beneficiaries) can be the primary beneficiaries of an irrevocable trust with a charity as the second beneficiary. In addition, you may be eligible for a tax deduction after your gift has been put into a charitable trust. 

For taxation, the CRT remainder interest is valued based on its present value. As a result, the charity does not incur any capital gains taxes, nor do you, as the donor. 

In the trust, your gifts are channeled to an income-producing investment. You or your heirs will receive this income. 

The income you get or that goes to a non-charitable beneficiary you have named can be fixed or a percentage of the trust value. Percentage income clauses allow your income from a CRT to rise or fall depending on the upward or downward fluctuations of the trust value. However, for CRT with a fixed income clause, you will receive a fixed income regardless of how badly or well the trust investments are doing. 

How Does a CRT Work?

In a charitable remainder trust, you contribute to charity while receiving income for yourself or a beneficiary. A CRT provides you with income while also allowing you to support a good cause. 

CRTs are set up so that you can make payments to yourself or a non-charitable beneficiary. You can receive annuities from a CRT as long as you live. Or for as long as the beneficiaries live, or for 20 years. Your trust can be set up to payout annuities every year, semiannually, quarterly, or monthly. The payout must be no more than 50% of the account’s assets each year, but no less than 5%. 

Once the term of the beneficiary ends, all trust assets go to a charity of your choice. Your CRT donation must go to charities that are IRS-approved.

You should know that contributions to CRTs are irreversible. As a result, you cannot claim any contribution except for the annuities. Be sure to keep in mind that a portion of it will be tax-deductible. 

Trust management is essential to a CRT. You must constantly and responsibly manage the account. You might lose valuable assets or incur a high tax bill if you don’t know how to do this properly. A bank or trust company can be a suitable corporate trustee, in that case.  

CRT Rules

Payments to a non-charity through a charitable remainder trust need to be denominated in fixed amounts annually. The trust value could also be determined using a fixed percentage. Herein are the only ways a charitable remainder trust can well qualify for a charitable deduction. 

Charitable remainder trusts are only eligible for deductions if their income does not exceed the annual payment, with or without provision to make up any shortfalls in coming years.  

On the applicable provisions of the law, the IRS has issued revised regulations. Among the changes is the inclusion of CRAT and CRUT clauses. 

Types of Charitable Trusts

There are many different types of charitable trusts, including: 

Charitable Lead Annuity Trust: The charitable lead annuity trust (CLAT) pays a charitable organization a specified amount for a specified period. Beneficiaries receive the remainder. With low interest rates, CLATs can be powerful tools for maximizing tax breaks. You can also transfer assets with minimal or no taxation to the next generation. 

Charitable Lead Unitrust: It is similar to a charitable lead trust (CLAT) in that you can get tax deductions from the trust. It differs from CLAT in that distributions are percentage-based. An allotment of the trust’s income is dedicated to a charity. The rest goes to an heir or beneficiary. The contribution, even though taxed, does offer some relief and provides a buffer from capital gains taxes. 

Charitable Remainder Annuity Trusts: Payments made to a beneficiary with the remaining assets contributed to a charity. Donors or beneficiaries can generate an income stream from this. The annuity cannot be less than 5%. Following the donor’s passing, the remaining funds are distributed to a charity. It is not permissible to make additional contributions, regardless of how well the trust’s value performs. Learn more about charitable remainder annuity trusts

Charitable Remainder Unitrust: Charitable remainder unitrusts (CRUTs) pay beneficiaries or heirs a fixed percentage based on the trusts’ value. Donors or beneficiaries receive income while they are alive, and the remainder goes to charity. Each year, the trust value is reevaluated, with changes to the income. 

Pros and Cons of Charitable Remainder Trust

Tax reduction

When the trust sells an asset, donors may also receive a stream of income and a deduction from income tax, capital gains tax, gift tax, and estate tax. In addition, the donor leaves a legacy after their death or termination of the trust. 

A gift that gives

Among the many advantages of CRTs is maintaining a continuous stream of income based on your assets. These payouts can be made directly to you or a beneficiary for life, depending on your situation. Also, you can contribute the remaining assets to charity. Thus, by placing your assets in a CRT, you will have a productive way of giving. 

Protects your estate

Furthermore, it prevents irresponsible family members or creditors from accessing the trust’s remainder.

The trust is unamendable.

However, not everyone can benefit from this arrangement. These are irrevocable trusts with terms that are not easily amendable. As a result, the donor cannot access the trust assets. 

Complex administration

In addition to being technically and financially challenging, the administration of CRT can also be complicated. Therefore, cost-benefit analyses are crucial when determining whether this trust will be more cost-effective for the proposed assets than alternative estate planning tools. 

Charitable Trust Example

Many of the largest, most influential private charities were established using a charitable trust model. For example, you have the J Paul Getty Trust funding arts programs worldwide, with a value of more than $10 billion. On the other hand, Bill and Melinda Gates Foundation championing microcredits, clean water, disaster relief programs, and sustainable agriculture programs. To learn more about charitable remainder trusts and set up one, speak with our estate planning attorneys. Call Hess-Verdon at (949) 706-7300.

Pros And Cons Of Charitable Remainder Trust

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Pros And Cons Of Charitable Remainder Trust

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