Should You Consider a Charitable Remainder Trust?

Are you considering ways to leave behind a legacy of giving? Charitable remainder trusts are excellent choices to consider as an option for retirement, estate, and tax planning.

What is a charitable remainder trust? 

A charitable remainder trust is just one way of allocating your wealth to charities you care about. That’s not all, though. While giving to a noble cause, you can enjoy a tax deduction on trust contributions and annual annuity payments to either yourself or your chosen beneficiary (or beneficiaries).

These trusts are irrevocable — no asset contributed to the trust can be withdrawn. Contributions can include cash, publicly-traded stocks, real estate, or other assets.

There are two types of charitable remainder trusts: annuity trusts and unitrusts.

Charitable remainder annuity trusts (CRATs): Contributions to these trusts are made when you initially set up the trust; additional contributions are not allowed thereafter. A fixed annuity is distributed each year.

Charitable remainder unitrusts (CRUTs): Unlike CRATs, additional contributions can be made to these types of trusts even after setup. Distributions are made on a fixed percentage based on trust asset balance.

What are the benefits of a charitable remainder trust?

1. Get a charitable tax deduction.

We love a tax deduction — and guess what? Your contribution to the trust is partially tax deductible. The exact amount depends on the contribution, the type and term of the trust, projected income distributions, and IRS interest rates on asset growth.

2. Use it as a vehicle for retirement income.

You can set yourself up to receive regular income payments from the trust, either immediately or deferred to a set date. Annual annuity payments can be set up between 5% to 50% of the trust’s assets. You can also set up another designated beneficiary (or beneficiaries) to receive annual payments.

3. Contribute to causes you care about.

Leave behind a legacy of generosity. Once the trust has been terminated — either after the trust period ends or upon the death of the last beneficiary — the remaining assets are donated to your charity (or charities) of choice.

4. Defer capital gains tax.

By contributing non-cash assets that have appreciated to the trust, you can defer capital gains tax until the income is distributed to the designated beneficiary.

How are charitable trust annuity payments taxed?

According to the IRS, annuity payments are taxed as follows:

1. Ordinary Income: Payments are treated as ordinary income first, up to the amount of the trust’s ordinary income for the year and any undistributed ordinary income from previous years. If the trust has sufficient ordinary income to cover all payments, the entire amount is taxed as ordinary income.
2. Capital Gains: Once the trust’s ordinary income is depleted, any further payments are taxed as capital gains, based on the sale or disposition of the trust’s capital assets. These payments are treated as capital gains to the extent of the trust’s current-year capital gains and any undistributed capital gains from prior years.
3. Other Income: After all ordinary income and capital gains are distributed, remaining payments are classified as other income, such as tax-exempt income, based on the trust’s current-year and accumulated other income.
4. Corpus: Lastly, when all income and gains have been fully distributed, any additional payments are considered part of the trust’s corpus or “principal,” which is not subject to tax.