Charitable Remainder Trust
Income and estate tax benefits
The charitable remainder trust is an irrevocable trust with two classes of beneficiaries - settlors receive a set percentage of income during their lifetime, and designated charities who receive the principal after death. Although irrevocable, the eventual charities can be changed during settlor's lifetime.
These trusts are often used where a settlor has appreciated assets with a low cost basis such as real estate of stocks that would attract capital gains taxation if sold. The charitable remainder trust does not pay capital gains tax, since the assets are destined for charity.
Because the trust is destined for charity, there is an income tax deduction. This deduction depends on the type of charity and the present value of the remainder interest for charity. The IRS requires that at least 5% of the net fair market value of the assets must be distributed as income. Distributing more causes less to be available within the trust, and could thus reduce the income tax deduction also.
The charitable remainder trust also bypasses the children on death, since the principal goes to the charities.
For these reasons, charitable remainder trusts are usually part of an overall estate plan in which other tools are used to provide more current income and inheritance to children.
On death, the CRT is considered to be outside the settlor's control [it is irrevocable], therefore it's value is not included in his estate and it does not attract estate tax.
A charitable lead trust is the reverse of a charitable remainder trust. It has the same preferential tax treatment, but reverses the beneficiaries... the charities receive income during settlor's lifetime while named beneficiaries receive the principal at death.
Our intent is to describe estate planning scenarios and solutions. We do not provide advice - for advice you should consult professionals such as attorneys and accountants.
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