Why Establish a Charitable Remainder Trust?

Charitable Remainder Trusts provide an excellent way for individuals to leave legacies to a charitable organization of their choice. In addition to providing important financial support to these organizations, there can be tax benefits which result from establishing a charitable remainder trust.

Who can establish a Charitable Remainder Trust?

A charitable remainder trust can be established by anyone who would like to leave a financial legacy to a charitable organization. It allows the donor to get recognition for the gift while the donor is still living. Such gifts may be made to colleges or universities, churches, civic organizations, arts organizations or any other not-for-profit organization.

Here is an example of how a charitable remainder trust can work. Let us say that Mrs. Doe wants to leave an asset (stocks, bonds, or real estate) to a charitable organization. At this point in her life, she may not feel comfortable giving up the income which results from this investment. By establishing a charitable remainder trust, Mrs. Doe can transfer the ownership of the asset to a charitable remainder trust, while retaining the income from the asset for her lifetime. Thus, she accomplishes two important goals: first, she has made a charitable contribution for which she will receive a substantial income tax benefit, and she has retained the income from the asset to pay her living expenses.

Now say, for example, that Mrs. Doe has an investment that may not be generating much current income, such as a parcel of vacant land. Selling the property and reinvesting the proceeds would result in capital gains tax. In this situation, Mrs. Doe could transfer the real estate to a charitable trust. The trust could sell the property and avoid all capital gains. The trust could then reinvest 100% of the proceeds from the sale of the property, resulting in more income to Mrs. Doe during her lifetime.

How a Charitable Remainder Trust can Benefit You

As a donor to a charitable trust you are entitled to receive a deduction for income, estate, or gift tax purposes. A charitable remainder trust permits the sale of appreciated assets by the trust without Federal income tax on the gain. Proceeds from the sale can be reinvested in a more diversified or higher-yielding income-producing investment portfolio. State and local taxes may also be avoided. This leaves more money to be reinvested and, ultimately, a larger income stream to the income beneficiaries.

You can also create a charitable remainder trust at death, and have it receive lump sum death benefits under a pension or profit-sharing plan. Income from charitable remainder trusts is taxable only to the extent it is distributed to the income beneficiaries. Undistributed capital gains or earnings in the trust accumulate tax-free.

In Conclusion

Before considering a charitable remainder trust, you should be aware of two disadvantages. First, the payments to the creator or surviving spouse are limited to the amount of fixed percentage set forth in the trust instrument. No other distributions can be made, regardless of need. Second, when you die, or when your spouse dies after you, the trust property passes to charity, not to children or other loved ones. Of course, a charitable remainder trust is first and foremost for someone with charitable interests. If you have strong charitable desires and wish to maximize your giving, a charitable remainder trust can be a valuable tool.