Over our lifetimes, estate planning goals often change. When our families are young, our priorities are usually planning to provide for them. As we grow older, we may develop broader goals, including defining our legacy and supporting charities that are meaningful to us. If you have regularly donated to a charity during your life, and considered leaving a bequest to a favorite charity after your death, a charitable remainder trust (CRT) might be a good option for you.
What is a Charitable Remainder Trust?
A charitable remainder trust is an irrevocable trust that generates a stream of income for you during your lifetime, with the remainder of the trust assets going to your chosen charity after your death. You can also create a CRT that gives an income stream to someone else for their lifetime. Because the trust is irrevocable, it removes assets from your taxable estate, which may provide a tax benefit. But the irrevocability of the trust means that you cannot later remove assets from the trust or revoke it.
There are two types of charitable remainder trust. The first is the charitable remainder annuity trust (CRAT). With a charitable remainder annuity trust, the trust pays you an annuity annually for your lifetime. Once you create and fund the trust, no additional contributions to the trust are allowed, and the amount of the annuity never increases or decreases.
The second type of CRT is a charitable remainder unitrust, or CRUT. Unlike a charitable remainder annuity trust, you can continue to contribute assets to a CRUT after the trust is initially funded. Rather than being paid a fixed annuity, as the beneficiary of the trust, you receive a percentage of the trust’s assets each year, so the amount of your payment fluctuates.
If you meet IRS eligibility requirements, you may be able to serve as trustee of a CRT that you create. However, these trusts are complex, and if you have sufficient assets to create one, you are probably better off hiring a professional trustee who has experience with the administration of CRTs. If you do administer the trust yourself, you will want to retain the services of a knowledgeable charitable remainder trust attorney to advise you.
Pros and Cons of Charitable Remainder Trusts
Charitable remainder trusts are not for everyone, and it is important to evaluate the pros and cons of using this option to support a favored charity after your death. A primary advantage of these trusts is, of course, that they provide a lifetime income stream for the grantor or someone that they designate. Another advantage is the potential tax benefits. As mentioned above, placing assets in an irrevocable trust such as a CRT removes those assets from your estate. Therefore, it can be used to keep the value of your estate below the lifetime exemption amount, shielding your assets from estate tax after your death.
In addition, when you fund a CRT with assets, you pay no capital gains tax when those assets are sold. If you have assets such as real estate, privately held business interests or publicly-traded stocks that are have or will significantly in value, a CRT might be a good option for you.
Last, but not least, with a CRT, you have the satisfaction of knowing that the wealth you have accumulated over your lifetime will do good in the world long after you are gone, whether that means supporting an educational institution, the arts, helping those less fortunate, or advancing some other cause you hold dear.
Even with all those advantages, there are some cons to establishing a charitable remainder trust. Chief among these is the irrevocability of CRTs. Once you place assets in the trust, you cannot remove them or use them for your own benefit. Therefore, if you decide to create a CRT, you should be certain you will not later need the assets you are using to fund the trust.
On a related note, using the remainder of the trust after your death to benefit a charity means that it will not be used to benefit your heirs. While you will, of course, not be around to witness the fallout, you should consider whether your choice to create a CRT will cause unintended consequences for your loved ones.
Lastly, you should be aware that distributions that you or other income beneficiaries receive from the charitable remainder trust might be taxable as ordinary income to the recipients.
In short, the decision of whether to create a charitable remainder trust should be made only after careful consultation with an experienced estate planning attorney. If you would like to learn more about the pros and cons of charitable remainder trusts or the relative merits of CRATs and CRUTs, contact Estate Planning & Elder Law Services to schedule a consultation.