Charitable Remainder Trust Advantages
If you're looking for a way to do some good and reduce the tax implications for your estate, one of the best ways to accomplish both is with charitable remainder trusts. These types of trusts allow you to set aside funds that provide assistance to a charitable institution while enabling you to still obtain income from the trust.
There are a variety of benefits that you can obtain from a charitable remainder trust, including tax breaks for you and your estate and the ability to obtain income from non-income producing assets. Additionally, these trusts can be set up to use the proceeds to fund a life insurance policy for an heir.
How Charitable Remainder Trusts Work
There are two main types of trusts that deal with providing income to a charity via a trust, and they are charitable remainder trusts and charitable lead trusts. The basic concept is the same, which is that you're providing assets to an organization through a trust and will obtain some type of income from the trust.
The difference between the two types of trusts is whether the assets from the trust go to the charity or the beneficiary after the term is over. With a charitable remainder trust, whatever assets are in the trust after the trust ends is given to the charity; with a charitable lead trust, the remaining assets are transferred to a beneficiary.
It's important to note that for you to be able to take advantage of the tax breaks related to a charitable trust, the organization you are giving to must meet the IRS' standards for being a charity. This usually means that the organization the trust is providing for is tax exempt. Additionally, these types of trusts are irrevocable, so they are not able to be changed after they have been set up.
The way the process works is that a property, usually one that is either not producing income or the sale of which would result in a large capital gains tax, is transferred to a charity via a trust. Throughout the term of the trust, which is either the life of the person who set up the trust or a period of no more than 20 years, income is provided to a beneficiary.
There are two ways that income can be derived from a charitable remainder trust. Income can be paid out as a percentage of the total value of the trust with a charitable remainder unitrust, or income can be paid out as a set amount with a charitable remainder annuity trust.
The advantage of a unitrust is that you can benefit from greater amounts of income when your trust is doing well. This type of income can also ensure that the trust is not depleted and there are significant assets to be passed on to a charity when the trust period ends, and it also tends to protect against inflation.
However, if you intend to use the income from a trust until the end of your life or are looking for stable income for another reason, you may want to go with the annuity trust. Setting up the trust as an annuity trust means that you'll be able to receive the exact same amount of income from the trust irrespective of how it's doing.
Benefits Of Charitable Remainder Trusts
- Income on non-income producing or high tax implication assets
If you have property that is not producing income or would result in a large capital gains tax if it was sold, you may want to consider a charitable remainder trust. With these trusts, you can assign the assets in question to a charity. From there, the assets can be sold and the profits can then be used in the trust, and provide you with income, without there being any tax implications for you.
- Tax deductions
When you make a donation to a charity through a charitable remainder trust, you'll be able to take advantage of an income tax deduction that can be spread out over five years. The amount of the deduction that you are able to claim isn't based on what you've donated; it's based on what you've donated minus what income you can expect. This can still result in a substantial reduction in the amount of income taxes you'll owe over a one to five year period.
- Reduce estate tax implications
Along with being able to take advantage of income tax deductions, charitable remainder trusts can also reduce the amount of taxes your estate may be responsible for. While the federal estate tax exemption amount hovers around $5.4 million, state estate tax exemptions are often much lower. The total proceeds to your charity of choice do not apply to your estate. Therefore, you're able to potentially make an income on otherwise non-income providing assets, take advantage of income tax deductions and possibly avoid or reduce the taxes to your estate.
- Fund a life insurance policy
Another way that you can use a charitable remainder trust to your advantage is to use it to fund a life insurance policy. When you set up the trust, you can have the payments assigned to pay the premiums for a life insurance policy for an heir. While you could pay for a life insurance policy without using a trust to fund it, this allows you to get the tax advantages of the trust while funding the policy.
Get The Most Out of A Charitable Remainder Trust
To be fully able to take advantage of a charitable remainder trust as well as to ensure that you're financially in a position to create one, it's a good idea to talk to professionals. If you don't select the right charity, set the trust up in the correct manner or understand how these trusts work, you may end up dissatisfied with the way the trust is run or the income from it. Estate planning attorneys can help you determine which trusts are most beneficial based on your circumstances and needs and help you set them up.