If you would like to balance your philanthropic goals with long-term financial planning, a charitable remainder trust (CRT) is worth looking into. A CRT lets you support one or more charities while providing an income for yourself or loved ones with the same assets. Here’s how it works.
When creating the trust, you name the beneficiaries, which can be you, your spouse or other loved ones, and legally designate one or several charitable organizations you wish to support. You then fund the CRT with assets, such as real estate, stocks or business interests, under the care of the trustee. You can even choose to become the trustee if you wish.
The beneficiaries will receive a steady income stream for life or a specified number of years. After the term of the trust ends or beneficiaries pass away, the remaining assets go to the charitable organizations you chose.
The tax benefits of a charitable remainder trust
Beyond donating to a meaningful cause, a CRT can spare your estate a lot in taxes. First, the assets in the trust don’t count as part of your taxable estate since they legally belong to the trust. This can considerably reduce your potential estate taxes.
Additionally, CRTs don’t result in capital gains. As such, the trust can sell appreciated assets tax-free and reinvest the full amount, allowing more capital to remain at work and generate income for the beneficiaries. That said, the distribution to beneficiaries may be taxed.
You’ll also enjoy an immediate charitable income tax deduction based on the present value of the portion of your assets that will eventually go to charity. This may lower your taxable income for several years. Think of it as the IRS rewarding you now for your future generosity.
Do it right
A charitable remainder trust is a sophisticated estate planning tool, and setting one up involves navigating complex rules, precise calculations and careful structure to ensure everything aligns with your goals and the legal requirements. Legal guidance is essential for creating a trust that you can make the most out of and secure your legacy long after you’re gone.