The Charitable Remainder Trust: A Type of an Irrevocable Trust
The charitable remainder trust (CRT) is managed by a trustee, and income is paid out to either the grantor or another named beneficiary while the charity receives a donation after the grantor has passed on. An estate planning lawyer may help set up and manage this type of trust.
How Does the CRT Work?
An asset is transferred into an irrevocable trust and is therefore no longer owned by you as the grantor. As a result, no estate taxes will be due on that asset when you pass away. In the present, you receive an income tax deduction for a charitable contribution.
The trustee sells the asset. They receive full market value without the need to pay capital gains. You or another named beneficiary will receive income generated by the trust until you pass away, and you will still get the benefits of having donated to charity. The Internal Revenue Service has mandated a limit on the amount of income that can be distributed each year.
There are two types of charitable remainder trusts. Charitable remainder annuity trusts (CRATs) distribute a fixed annuity amount each year. Additional contributions are not allowable. Charitable remainder unitrusts (CRUTs) distribute a fixed percentage based on the value of the trust’s assets. Additional contributions may be made.
What Assets May One Donate to a CRT?
You may donate different types of assets to a charitable remainder trust, including real estate, cash, publicly traded securities, and certain types of non-public stock, among others. Your New Jersey estate planning lawyer may be able to provide you with more information about which assets can be included in your CRT.
Donor or Family Receives an Income Stream
Income generated by the trust is distributed. When you die, the charity of your choice will receive the remaining funds. One benefit is that you or your stated beneficiaries can receive income in several ways: annually, semi-annually, quarterly or monthly. The annual annuity must be at least 5% but no more than 50% of the trust’s assets.
Minimal Taxes and Protection From Creditors
The investment income that is generated by the trust is not subject to income tax at the trust level. Many people contribute assets that have appreciated significantly since the time that they were first acquired, and no capital gains taxes will be assessed to the donor when they are sold. However, distributions to you as the grantor or to the beneficiaries that you have named are subject to income tax upon receipt. Since you are no longer the owner of the assets, they cannot be reached by your creditors.
Income May Be Paid During Your Lifetime
You can take the income from the trust now, but you can postpone it until later. It can be paid to you or your surviving spouse. It can also be paid to your children.
If you postpone taking income now, the assets may appreciate, providing a higher income for the future. If the assets are managed well, this will be a benefit for using this type of trust.
Giving to One or More Charities
After your death, the assets are distributed to the charity or charities that you have designated. They can be private foundations or public charities. While the trust is still in force, there is the ability to change beneficiaries.
The Knee Law Firm, LLC, is here to help you with estate planning and the charitable remainder trust. We have gained the knowledge and experience to understand your unique circumstances. Our knowledge of elder law and estate planning, as well as estate administration, benefits our clients.
You can reach our Hackensack office by calling us at (201) 996-1202. You can also contact us online to set up an appointment to learn more about having a charitable remainder trust as part of your comprehensive estate plan. Our experienced team is ready to help you with your estate plan, so reach out today.