An effective tool in estate planning that can allow you to support your favorite charities while saving on taxes and generating income for yourself or your heirs is a charitable remainder trust (CRT). This type of trust can help you solidify your legacy while also offering you the ability to reap a number of benefits.
At Hunter Sargent, PLLC, our estate planning lawyers can help you set up a charitable remainder trust and guide you as you make decisions for your future and for that of your loved ones. Take a closer look at how our charitable remainder trust attorneys can help.
What Is a Charitable Remainder Trust?
A charitable remainder trust is a tax-exempt and irrevocable trust that lets you pursue philanthropic goals while generating income at the same time. It’s a split-interest giving vehicle that lets you make contributions to the trust for a partial tax deduction based on the assets of the trust that will go toward charities.
You or someone you name will then receive a steady income stream for a set period, with the rest of the assets going toward the charities you choose.
Benefits of Charitable Remainder Trusts
The most obvious benefit of a charitable remainder trust is that it can reduce taxable income and also help you avoid the capital gains tax you would be liable for if you sold the assets you placed on the trust outright. You can also see a reduction in gift and estate taxes.
This type of trust allows the trustor or their designated non-charitable beneficiaries to receive a steady stream of income and donate money to charity as well. After your death, the trust protects the income from creditors and ensures that it goes toward the charities you’ve selected.
After retirement, you may want to reduce or delegate oversight of your personal assets. A remainder charitable trust lets you eliminate or greatly reduce the oversight burden connected with management-intensive assets.
Types of Charitable Remainder Trusts
You can choose between two types of charitable remainder trusts in Texas. The main difference between them is whether they pay a fixed or fluctuating amount to the non-charitable beneficiaries per year.
Charitable Remainder Annuity Trust
A charitable remainder annuity trust (CRAT) distributes a yearly fixed annuity to non-charitable beneficiaries. The amount has to fall between 5% and 50% of the trust’s assets, and it remains the same every year. The CRAT doesn’t allow for additional contributions.
Charitable Remainder Unitrust
Alternatively, a charitable remainder unitrust (CRUT) offers a fixed percentage based on the trust asset’s value. This value is reassessed each year. This means that the annual amount can change, but it must remain between 5% and 50% of the trust’s assets. A CRUT does allow you to make additional contributions.
How Charitable Remainder Trusts Work
The main idea behind a charitable remainder trust is to reduce taxes. You can do this by donating assets to the trust and then having the trust pay income to non-charitable beneficiaries for a set amount of time. This amount of time can’t be longer than 20 years or the lifespan of one or more beneficiaries. Once this timeline expires, the remaining trust assets go to the charities you’ve chosen.
Many asset types can be added to a charitable remainder trust. These include:
- Stocks
- Cash
- Private business interests
- Real estate
- Private company stock
You can receive a tax deduction that is based on the trust type and its terms, the interest rates that the IRS set up (determined by the asset’s projected growth rate), and the projected income payments to the non-charitable beneficiaries.
Remember that you can’t modify or terminate these charitable trusts without having permission from all of the charitable beneficiaries.
Tax Implications of Remainder Trusts
The moment that you set up a charitable remainder trust, you’re generally entitled to a partial tax deduction for the assets you placed in the trust. The assets contributed can also grow tax-free in the trust. Because this is an irrevocable trust, you are removing the assets from your estate, so they won’t typically be part of the probate process and won’t be subject to estate taxes.
Who Can Benefit From a Charitable Remainder Trust?
Charitable remainder trusts can be a great option for people who want to get income payments each year while avoiding the capital gains tax on the sale of appreciated assets. It can also be ideal for people who want to see their investments grow tax-free within the trust. Those who want to help one or more charities can benefit from charitable trusts, too.
Do I Have to Take the Income Now?
No, you don’t have to take the income immediately. When you create the charitable remainder trust, you can take the income tax deduction now, but you can postpone the income. This allows the assets to be appreciated, and in the end, it can result in more income.
Creating a Charitable Remainder Trust
The process of beginning a charitable remainder trust requires that you hire a qualified estate planning attorney because of the complexities involved in the process. The right lawyer can help you determine what your charitable goals are. For example, what organizations would you like to receive your donated assets?
Once you know who the CRT’s charitable beneficiary or beneficiaries will be, you’ll have to decide on who the non-charitable beneficiaries are. It could be you or your heirs.
The next step is to determine the trust assets. These can be stock, cash, and other complex assets. You then have to select the trustee. This is the person who will manage the trust and its assets. They’ll be in charge of investment performance and many other responsibilities.
Next, you’ll set the payout rate and term. Keep in mind that the payouts to income beneficiaries should be between 5% and 50%. Your lawyer can help you understand what the rates and terms should be to provide the income stream you want.
Finally, you will need to fund the trust. Move the assets to the CRT, and start reaping the tax management benefits.
Getting Started With a Charitable Remainder Trust in North Texas
If you’ve been considering ways to reduce your income taxes while better managing highly appreciated assets, CRTs may be the solution for you. At Hunter Sargent, PLLC, we have years of experience helping clients throughout North Texas with estate planning concerns, including the set up of charitable remainder trusts. We can provide the guidance you need to make the best choices for your estate.
Contact our team to schedule a consultation with one of our lawyers today.
Frequently Asked Questions
What Income Tax Deduction Can I Expect?
When determining the deduction, an important factor to watch out for is the payout rate. The higher this is, the lower your deduction typically is. Other things that can impact the amount are the type and value of the charitable assets, how old the people receiving the assets are, and the applicable interest rates.
Usually, the income tax deductions are limited to 30% of adjusted gross income. In some instances, however, it can be as high as 60%. If you choose not to use the full deduction for one year, you can carry it forward for five years.
Should I Be the Trustee?
You can be the trustee, but you want to ensure that you have the necessary knowledge and experience in administering trusts. If there are administrative issues, you could face penalties and even lose your annual income. A good option can be to name yourself the trustee but let third parties handle the paperwork.