Estate planning is a process that takes some work to understand. This is particularly the case with trusts. So many types of trusts exist, and it seems like only financial advisors understand them all. This week we are helping to clarify the details of one kind of trust. Read on to learn all you need to know about charitable remainder trusts.
What Are Charitable Remainder Trusts?
Charitable remainder trusts are a type of tax-exempt irrevocable trust that intentionally reduce the taxable income of an individual. They dispense a certain amount of income each year to the beneficiaries. Then, the rest (“the remainder”) goes to a pre-selected charity.
Types Of Trusts
There are two different types of charitable remainder trusts.
C.R.A.T. stands for “Charitable Remainder Annuity Trust”. This type of trust dispenses a certain amount of money to the beneficiaries every year. Legal and financial experts call that annual income an annuity. Thus, the “A” in C.R.A.T.
C.R.U.T. stands for “Charitable Remainder Uni-Trust”. This types of trust distributes a certain percentage of the value trust’s assets to beneficiaries.
How Does It Work
First an attorney establishes the trust. This guarantees that the trust’s paperwork is properly in order and legitimate.
Then, you move money or appreciating assets into the trust. Discuss which assets and how much money with your attorney. They know how to maximize the benefits of the trust.
Name the beneficiaries. For many people, they name themselves. However, the beneficiaries can theoretically be anybody. The beneficiaries might receive income from the trust for a certain number of years, or the lawyer might specify the trust covers the rest of their lives.
Note that the Charitable Remainder Trust is a tax-exempt trust. This means that any and all income from the trust is tax free.
After establishing the beneficiaries, pick the charity that you want the remainder to go to. This charity receives the remaining balance of the trust either at the end of the trust’s terms or when the beneficiaries pass away.
Irrevocable Vs. Revocable Trusts
Charitable remainder trusts are irrevocable, but what does that mean? Let’s look into irrevocable vs. revocable trusts.
Essentially, a revocable trust is more flexible than an irrevocable one. It is okay for the grantor to change things and amend the trust. On the other hand, an irrevocable trust (with a few key exceptions) is not flexible.
The differences are more complicated than that, and vary depending on the type of trust. Read more here.
Benefits of a Charitable Remainder Trust
A big benefit of a charitable remainder trust is that it reduces taxable income considerably. Beneficiaries reap the rewards of a lower or nonexistent income tax.
Additionally, if the trust sells any of the assets it contains, there is more money within the trust to reinvest. This is because income tax does not work the same for an outright sale as the sale of assets held within an irrevocable trust.