What is a Charitable Remainder Trust?

(This is going to be the first in a series of advanced estate and charitable planning topics we are going to be covering each week)

A charitable remainder trust (CRT) is a powerful charitable vehicle that provides two essential benefits to the donor. The first benefit is a charitable tax deduction. The second benefit is an income stream for the donor or for designated beneficiaries of the donor. Charitable trusts are irrevocable which means once the trust is created it usually can’t be dissolved by the donor.

As experienced Arizona charitable trust lawyers we can explain how trusts works and explain your best financial options.

How a Charitable Remainder Trust works

According to Fidelity Charitable, the donor funds the trust with cash, publicly traded securities, some other qualifying stocks, private business interests, or assets that aren’t traded publicly such as real estate.

Funding of the trust and eligibility for the tax deduction depends on the following factors:

• The type of trust
• The length of the trust
• The income payment projections
• IRS interest rates

Ability to receive income

Income payments are made yearly, twice-yearly, four times a year, or monthly. The IRS requires that the income (on a yearly basis) distribution be somewhere between 5 and 50 percent of the trust assets.

There can be more than one named income beneficiary. The income beneficiary is not a charity. The income stream can run for up to 20 years or for the lifetime of one or more of the named beneficiaries.

Termination of the CRT

Trusts should be created to run for a specific number of years or until the death of the last beneficiary eligible to receive income. When the CRT ends, the remainder of the assets are then distributed to the named charity beneficiary. Named charities can be private or public and include Donor Advised Funds. The ability to change the charitable beneficiaries during the existence of the trust depends on how the trust was created.

The two types of charitable remainder trusts

The two kinds of CRTS are:

• Charitable remainder annuity trust. Income is distributed based on a fixed amount. Additional contributions are prohibited.
• Charitable remainder unitrust. A fixed percentage of the trust balance must be distributed yearly. Additional contributions are allowed. We will address the complex versions of a unitrust including NIMCRUTS and FLIPCRUTS in future posts.

Why create a CRT?

A CRT can be created while the donor is living or through his/her will. The main benefits are to support charities in the long-term while providing income to you or people you care about in the short term.

Other benefits and considerations include:

• The tax deduction eligibility applies when you fund the trust and is based on the projected remainder distribution
• The investment income is tax-exempt though the named income beneficiaries are required to pay income tax on the amounts they receive
• There may also be signficant capital gains tax savings if deployed in advance of the sale of a business (more on that in a future post)

Talk to an experienced Arizona charitable trust lawyer today

Our Tempe Arizona lawyers help people manage their financial resources to maximize their investments, reduce taxes, and meet their desires. We prepare legal documents during your lifetime to help loved ones and charities. We also discuss and analyze your estate planning needs. At Yaser Ali Law, we represent clients at all income levels. For help understanding how charitable trusts can benefit you, your loved ones, and charities, please call us at (480)-442-4175 or fill out our contact form to make an appointment.