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The benefits and perils of a charitable remainder trust

On Behalf of | Sep 15, 2020 | Estate Planning, Trusts |

There are different types of trusts that can serve different purposes. The charitable remainder trust (CRT), for example, is a popular type of irrevocable trust for charity-minded individuals. It offers a variety of benefits, but there are some potential risks as well.

Benefiting charities and donors

One of the main benefits of this trust is that it enables donors to reduce the cost of their generosity. It does this while providing income to the donor, who can also act as the trustee while still alive. Once the donor (or their spouse) dies, the trust bypasses probate and the remainder of the trust goes to one or a combination of a church, charity, private foundation or qualifying non-profit.

While the trust creator is still alive, the trust also provides a way to shelter a highly appreciated asset, such as real estate, a business or stocks. The assets are placed in the trust and subsequently sold, thus avoiding a prohibitively high capital gains tax. The couple can deed a percentage of the sale (perhaps of a home) above the capital gains exclusion on a personal residence to the CRT. The taxes are limited to a percentage of the adjusted gross income, while the remaining amount above the threshold can be rolled over for five years.

Five areas of concern

Irrevocable trusts are designed to be inflexible. This can lead to problems that are hard to fix. These include:

  • The amount paid to the donor is a fixed percentage, which may end up being too much or not enough.
  • The trust passes to a charity rather than family after the donor or their spouse dies.
  • 10% of the CRT’s initial amount must be paid to the charity or group of charities, even if more than 90% of the trust was paid back to the donor.
  • An inaccurate assessment of assets’ value leads to miscalculations that mean losing money.
  • Exhaustion of trust can lead to tax penalties.

Independent counsel can help

Major non-profits can help the donor set up a CRT, but these organizations’ primary interest is serving their best interests. Instead, donors may want to establish their independent CRT with help from a knowledgeable estate law attorney who knows how to create a trust that serves the client’s needs.