Charitable Remainder Trust

What Is a Charitable Remainder Trust?

A charitable remainder trust is an irrevocable tax-exempt trust that creates a “split interest” consisting of an income interest paid throughout the trust term and a remainder interest distributed at the end of the trust term.

The income interest is paid to an individual (income beneficiary), who is typically the trust’s donor, for either a fixed period of time (up to 20 years) or for the individual’s lifetime. At the expiration of the trust term, the remainder interest is distributed to a qualified charitable organization of the donor’s choice as specified in the trust document. Qualified charitable organizations include public charities, private foundations, and donor-advised funds.

Benefits of a Charitable Remainder Trust​

Because a charitable remainder trust is a tax exempt trust, assets that are contributed to the trust, and later liquidated, are not taxed to the trust. Instead, the full value of the liquidated proceeds from appreciated assets that are sold by the charitable remainder trust remain invested in the trust. By contributing appreciated assets to a charitable remainder trust, donors avoid the immediate recognition of capital gains tax that would result if they sold the assets outright.

Most assets contributed to a charitable remainder trust provide donors with a current income tax charitable deduction that offsets all forms of taxable income.

Donors who own highly appreciated assets that produce little or no annual income may be reluctant to sell them outright because of the negative effects from the capital gains tax upon their sale, and the resulting loss of future cash flow from the reduced net proceeds. A charitable remainder trust offers the ability to sell the assets free from capital gains tax, enhancing tax-free investment return and increased future cash flow to the income beneficiaries.

With careful design and investment management, certain types of charitable remainder trusts can defer trust income for later distribution in subsequent years to income beneficiaries. This can allow for tax-free growth of trust assets, resulting in a larger cash flow to an income beneficiary for future years to fund retirement living expenses or other financial needs. This may also enhance the value of the trust’s remainder interest that is distributed to charity upon expiration of the trust term.

Upon retirement, many prefer to scale back or delegate oversight of managing personal assets. A charitable remainder trust allows a donor to reduce or eliminate the oversight burdens associated with management-intensive assets. It also offers the advantages of retaining a professional asset manager during one’s later years when it may be most needed or desired.

A charitable remainder trust offers an effective alternative to the payment of gift and estate taxes. Assets transferred to a charitable remainder trust are typically excluded from estate taxes. This may be compelling for donors who wish to provide the most benefit to charity at the expiration of the trust term. Gift taxes are still applicable to taxation unless both income beneficiaries are spouses, or there is only one income beneficiary who is also the donor.

Who Should Create a Charitable Remainder Trust?

Anyone who desires:

  • Avoiding capital gains tax on the sale of appreciated assets.
  • Tax free growth of investments within the trust.
  • Income payments each year.
  • A current-year income tax charitable deduction.
  • To provide a financial benefit to charity when the trust terminates.

A charitable remainder trust is a powerful tool for generating a long-term income stream while enjoying tax benefits and facilitating a significant gift to a charity of choice. A charitable remainder trust is also a good option for those who wish to provide for heirs while also allowing for a remainder to be paid out to charity.

How Does a Charitable Remainder Trust Work?

Ren partners with you to help determine if a charitable remainder trust is appropriate for you. There are two categories of charitable remainder trusts: charitable remainder annuity trust and charitable remainder unitrust.

Charitable remainder annuity trusts distribute a fixed annuity amount each year to income beneficiaries based upon the value of the assets that are initially contributed to the trust. Charitable remainder annuity trusts may only be funded once and do not allow future additional contributions to the trust.

Charitable remainder unitrusts distribute a unitrust amount each year to income beneficiaries, which is a fixed percentage of the value of the assets at the beginning of each calendar year. The trust assets are revalued annually, so the income interest can increase or decrease with the value of the trust. Additional contributions to the trust are permitted.

Once the type of trust is determined, we consult with you to review detailed terms of the trust, including the fixed percentage payout rate, the projected income payments, IRS interest rates, and other IRS-required provisions.

From there the income interest will be paid out to your income beneficiary for a lifetime or at the conclusion of the term of years. The remainder interest will then be passed on to a qualified organization, such as a charity, family foundation, or donor-advised fund, as specified in the trust document.

How to Create a Charitable Remainder Trust

Creating a charitable remainder trust involves the following steps and considerations. Be sure to consult with trusted legal and financial advisors throughout the process.

  • Determine your charitable goals. Identify the cause you would like to support with your charitable remainder trust. It could be a charity, educational institution, or an IRS-qualifying nonprofit organization.
  • Choose your assets. In most cases, you can transfer assets to a trust in the form of cash, stocks, real estate, and other complex assets.
  • Select the trustee. Appoint someone to manage the trust and associated assets. It could be you or another individual, bank, or trust company.
  • Hire an attorney. You must hire an attorney to draft the governing document and obtain a tax ID number from the IRS.
  • Fund the trust.  Transfer assets to the charitable remainder trust. When the trust ends, either upon death of the last income beneficiary or a specified period of time, any remaining assets are distributed to designated charitable beneficiaries.

Charitable Remainder Trust Resources

Quick Guide

Reference Guide for charitable remainder trusts.

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Gift Summary

Download a PDF version of this page.

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Charitable Remainder Trust Handbook

An in-depth guide to the workings and variations of charitable remainder trusts.

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Donor Story

Steve and Michelle Caine avoid capital gains tax on the sale of gifted stock.

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FAQs

Charitable remainder trusts are conceptually the inverse of charitable lead trusts. Charitable lead trusts make payments to charity during the trust term, and upon the expiration of the term, distribute the remainder of the trust to non-charitable beneficiaries (individuals). By contrast, a charitable remainder trust provides regular income for non-charitable beneficiaries (individuals) during the trust term and distributes the remaining assets to a charitable organization at the end of the term.

Cash, publicly traded stocks, real estate, and other complex assets may fund a charitable remainder trust. Note that non-liquid assets may need to be sold or coupled with a cash donation to ensure that the trust has adequate resources to make all the required payments. S corporation stock and mortgaged real estate are generally not acceptable funding assets.

A donor-advised fund is a permissible remainder beneficiary of a charitable remainder trust, which is a powerful option for creating a philanthropic legacy upon your passing.

Yes, a charitable remainder trust’s investment income is exempt from taxation.

At your death, the full value of the trust is distributed to the charitable beneficiary. The value of the remainder interest is likely to be larger than if you had lived to or beyond your life expectancy. The cash flow created by a charitable remainder trust can be used to purchase life insurance, commonly referred to as “wealth replacement”, which may allow you to provide financially for your heirs in the event of your untimely death. The combination of the charitable remainder trust and wealth replacement insurance may allow you to provide a significant legacy to charity without disinheriting your heirs.

How to Get Started with a Charitable Remainder Trust

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