When you are going through the process of estate planning, it is natural to feel overwhelmed by the many different options available to you. For instance, many estate plans include a living trust. However, the options do not stop here.
In addition to providing for their families and loved ones, many people wish to use their assets to help fund their favorite charities. Not only will donating generously help you feel good and make a lasting impact on charities, you and your family can also reap tax benefits from donating. The most popular variety of charitable trust is a charitable remainder trust, or CRT.
How does a CRT work?
In order to create a CRT, you must first create a trust. Then, you must transfer all assets to the trust that you wish to donate to your charity of choice. In order to have a functioning CRT, the Internal Revenue Service must approve of your chosen charity. Usually, this means that the charity must be tax-exempt.
There are versions of CRT’s where you simply transfer your assets to charity in exchange for an income stream and others where you manage the proceeds of the sale of the assets and control the collection of your income during your lifetime.
If you donate your asset directly to a charity, your chosen charity will function as the trustee and be in charge of trust administration. The charity will be in charge of investing and managing the funds. The charity will also give you (or a named beneficiary) a specified income stream that can last for your life and/or the life of your spouse, or can be payable for a specified number of years (not to exceed 20 years on this option to you, your spouse, and then your specified beneficiaries.
An annuity payment means that you get the same amount of money from the trust each year, no matter if the trust performs well or poorly. With a percentage payment, you get a certain percent of the year end value of the investment portfolio each year. Percentage payments are more common since it is easier to get a charity to manage the CRT if there is no risk of loss.
When you die or the stated number of years expires, the trust ends and the assets in the trust go to the charity.
What are the benefits of a CRT?
A primary benefit of a CRT is being able to support a worthy cause. However, there are tax benefits as well. Once you have created a CRT, you may then take an income tax deduction spread over a period of five years typically. This deduction will not be a dollar-for-dollar amount. Since you can expect to receive interest payments from the CRT, the deduction will be the amount of your donation minus expected returns on the investment.
Another tax benefit to CRTs occurs after your death. Since the charity will absorb everything, any assets in the trust will not count toward your total estate. This means that the IRS will not subject these assets to estate tax. There are no worries regarding how to settle a trust.
Finally, CRTs will allow you to avoid capital gains tax. If you place stocks into a CRT and the trustee (or the charity) elects to sell stock or real property, for example, the government will not tax profit from the sale. In turn, you or the charity may elect to invest the profits in a less-risky investment, like a mutual fund. The CRT will then pay a specified amount of interest to you. On the other hand, if you had tried to sell the stocks yourself, the IRS would subject all profit to capital gains taxation.
Estate planning strategies can be complex. Contact AmeriEstate to learn more about our comprehensive estate planning services.