October 21, 2021

Volume XI, Number 294

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The Basics of Charitable Remainder Trusts

Planning on making a large gift to charity? Rather than making a gift outright, it might beneficial to consult an attorney and set up a charitable remainder trust, an instrument that allows you to donate to charity while still receiving income from the property, as well as providing tax breaks to the settlor and settlor's heirs. These types of trusts can be a crucial element of an estate or financial plan, especially if you are considering making large charitable gifts.

Basic Provisions

The first thing to note with charitable trusts in general is that these types of trusts are irrevocable. You will have to transfer legal control over your property to a charity, effectively giving it away. This shouldn't be a bitter pill to swallow for those already interested in making large charitable donations, however. The recipient of the donation must be an approved charity, which is usually a tax-exempt organization as defined by the IRS.

The charitable remainder trust works like this - you, as settlor, set up the trust and transfer the property you mean to donate to the trust. The charity then acts as trustee for the trust, investing the trust principal and paying a certain amount to the settlor as an annuity for a specified number of years. When the settlor dies or the specified period of time elapses, the remainder of the trust assets is distributed to the charity.

Types of Charitable Remainder Trusts

There are two basic types of charitable remainder trusts - the charitable remainder unitrust ("CRUT") and the charitable remainder annuity trust ("CRAT"). The CRUT pays to the settlor an annuity amount as a percentage of the fair market value of the donated property, revalued annually. A CRUT can pay more as an annuity if the trust performs well, but the settlor also bears the risk that the trust will underperform and the annuity can decrease. The CRAT pays an annuity as a fixed percentage of the donated assets, so the settlor receives the same payment every year.

Tax Implications

Settlors of a charitable remainder trust can take an income tax deduction over five years for the value of the gift. The amount of the deduction is based on the gift made minus the value of the prospective income from the trust. For estate tax purposes, the trust assets are removed from the settlor's estate, so this value won't be subject to estate tax. Possibly the best news about the charitable remainder trust from a tax perspective is that assets put into the trust aren't taxed for capital gains purposes, and any gains made as property of the trust are tax-exempt.

© 2021 by McBrayer, McGinnis, Leslie & Kirkland, PLLC. All rights reserved.National Law Review, Volume V, Number 65
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About this Author

Margaret S. Barr, Estate Planning Attorney, McBrayer, Law firm
Associate

Ms. Barr is a member of the firm's estate planning and administration practice group where she practices in virtually every aspect of estate planning & administration, including wills, trusts (qualified domestic trusts, educational trusts, dynasty trusts), powers of attorney, and advance directives. She understands that estate matters are very personal and is dedicated to providing hands-on attention to the professionals she represents so that their estate matters are handled the right way in every case.

She also assists individuals in the administration of their loved ones'...

859-231-8780, ext. 308
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