Episode 3: Tax Benefits Of A Charitable Remainder Trust Memento Mori Estate Planning Podcast
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- Education
A charitable remainder trust is an often-overlooked estate planning tool for persons with charitable (or tax-planning) goals who fear losing the use of assets during life. This article provides an overview of charitable remainder trusts for planning during life and after death, outlining the flexibility, risks, and tax benefits of the trust.
Like all trusts, a charitable remainder trust involves the transfer of assets to a middleman, called the trustee. The trustee distributes the assets to persons (or entities) known as beneficiaries. A charitable remainder trust has two categories of beneficiaries. The “life” beneficiary is often the donor (the person creating the trust and contributing the assets). However, it may be anyone named by the donor, provided that at least one beneficiary is not a charity. This beneficiary receives a distribution from the trust for the rest of his life (or for a stated term not to exceed twenty years) on an annual basis. At the end of the beneficiary’s life or after the stated term, the assets remaining (the remainder) in the trust are distributed to the “death” or “remainder” beneficiary for a charitable purpose. The “death” or “remainder” beneficiary must be a charitable organization or to a continuing trust established for charitable purposes.
Flexibility
It is important to note that charitable remainder trusts are irrevocable. As such, they are not the solution for every individual with charitable objectives. A charitable remainder trust has a “Jekyll and Hyde” level of flexibility. At creation, the trust is extremely flexible. The donor creates the rules governing the charitable remainder trust. Those rules need only to fall within the guidelines established by the Internal Revenue Code.
After the charitable remainder trust has been created, this irrevocable trust can rarely be changed. One exception to this principle is that the donor may retain the right to change the charity that will receive the remainder distribution. However, the rules governing the trust may permit the donor to have input. The donor may name the trustee to manage the trust assets. In many cases, the donor may also serve as trustee.
Risk
The assets in a charitable remainder trust are often invested in securities. Therefore, the trust assets are at the risk of the market. Unsophisticated trustees should utilize the services of a trusted and competent investment advisor.
Taxation
A charitable remainder trust affords tax benefits to both the trust and the donor. As a charitable entity, a charitable remainder trust pays no taxes on income or capital gains.
Similarly, since a donor can transfer cash or property to a charitable remainder trust, a donor can realize tax benefits through careful planning. Generally, naming a charity as a beneficiary of a Will or revocable living trust provides no immediate tax benefit to a donor. Those instruments may be changed, and the donor may choose to remove the charity as a beneficiary at any time. In contrast, as an irrevocable trust, a charitable remainder trust allows the donor to take an immediate tax deduction for his contributions to the trust. This immediate deduction is appealing for those incorporating charitable planning into their estate plans.
If the remainder beneficiary of the charitable remainder trust is a private foundation, a donor’s deductions will be subject to the income limitations for gifts to private foundations. Donors who choose to transfer appreciated securities or property can avoid capital gains taxes while receiving payments from the undiminished proceeds from the sale of transferred property.
Overall, charitable remainder trusts should be a consideration for any individual seeking to leave assets to charities post death. Potential donors should weigh the irrevocable nature of the trust against its tax benefits.
A charitable remainder trust is an often-overlooked estate planning tool for persons with charitable (or tax-planning) goals who fear losing the use of assets during life. This article provides an overview of charitable remainder trusts for planning during life and after death, outlining the flexibility, risks, and tax benefits of the trust.
Like all trusts, a charitable remainder trust involves the transfer of assets to a middleman, called the trustee. The trustee distributes the assets to persons (or entities) known as beneficiaries. A charitable remainder trust has two categories of beneficiaries. The “life” beneficiary is often the donor (the person creating the trust and contributing the assets). However, it may be anyone named by the donor, provided that at least one beneficiary is not a charity. This beneficiary receives a distribution from the trust for the rest of his life (or for a stated term not to exceed twenty years) on an annual basis. At the end of the beneficiary’s life or after the stated term, the assets remaining (the remainder) in the trust are distributed to the “death” or “remainder” beneficiary for a charitable purpose. The “death” or “remainder” beneficiary must be a charitable organization or to a continuing trust established for charitable purposes.
Flexibility
It is important to note that charitable remainder trusts are irrevocable. As such, they are not the solution for every individual with charitable objectives. A charitable remainder trust has a “Jekyll and Hyde” level of flexibility. At creation, the trust is extremely flexible. The donor creates the rules governing the charitable remainder trust. Those rules need only to fall within the guidelines established by the Internal Revenue Code.
After the charitable remainder trust has been created, this irrevocable trust can rarely be changed. One exception to this principle is that the donor may retain the right to change the charity that will receive the remainder distribution. However, the rules governing the trust may permit the donor to have input. The donor may name the trustee to manage the trust assets. In many cases, the donor may also serve as trustee.
Risk
The assets in a charitable remainder trust are often invested in securities. Therefore, the trust assets are at the risk of the market. Unsophisticated trustees should utilize the services of a trusted and competent investment advisor.
Taxation
A charitable remainder trust affords tax benefits to both the trust and the donor. As a charitable entity, a charitable remainder trust pays no taxes on income or capital gains.
Similarly, since a donor can transfer cash or property to a charitable remainder trust, a donor can realize tax benefits through careful planning. Generally, naming a charity as a beneficiary of a Will or revocable living trust provides no immediate tax benefit to a donor. Those instruments may be changed, and the donor may choose to remove the charity as a beneficiary at any time. In contrast, as an irrevocable trust, a charitable remainder trust allows the donor to take an immediate tax deduction for his contributions to the trust. This immediate deduction is appealing for those incorporating charitable planning into their estate plans.
If the remainder beneficiary of the charitable remainder trust is a private foundation, a donor’s deductions will be subject to the income limitations for gifts to private foundations. Donors who choose to transfer appreciated securities or property can avoid capital gains taxes while receiving payments from the undiminished proceeds from the sale of transferred property.
Overall, charitable remainder trusts should be a consideration for any individual seeking to leave assets to charities post death. Potential donors should weigh the irrevocable nature of the trust against its tax benefits.