Americans are well-known for their propensity to give, with charitable donations hitting a record high of $358 billion in 2014 according to the Giving USA Foundation. The challenge that many would-be donors face is balancing their own financial needs with their desire to help their favorite causes. Using a charitable remainder trust can allow you to achieve both of those goals, ensuring a steady stream of income for yourself or your loved ones during their lifetimes while providing for a sizable charitable gift in the future. Let's look more closely at charitable remainder trusts and how they can help you.
What a charitable remainder trust is
A charitable remainder trust is an arrangement that starts with your transferring property into the trust. Once that occurs, the person or institution you name as trustee manages the property, usually in a manner that generates income or increases the value of the trust assets over time. With most charitable remainder trusts, the donor retains the right to receive income from the trust throughout the donor's lifetime, and often, married donors will retain an income interest throughout their joint lives. After all income beneficiaries of the trust have passed away, the trustee transfers the remaining property to the named charities in the trust document.
Structured in this way, charitable remainder trusts give you two primary benefits. First, the income from the trust during your lifetime can supplement your income, which is especially useful for those who have retired. Second, even though the transfer of assets to charity doesn't happen until your death, the IRS allows you to take a tax deduction now when you create the charitable remainder trust.
Structuring your income payout
When you create a charitable remainder trust, you have two options to determine how much income you'll receive. An annuity trust establishes a fixed dollar amount that you receive every year. Annuity trusts have the benefit of stability, but they don't allow you to participate in the growth of the trust's asset value, and if the trust performs badly, it can run out of money during your lifetime.
The other form of charitable remainder trust is called a unitrust. This arrangement pays a set percentage of the total trust assets as of the end of the previous year. This leaves the donor exposed to changes in the value of the trust assets, with greater income payments during high-return periods and potentially smaller payments when asset values fall. One benefit of the unitrust is that it can't run out of money, although its payments can get so small that they probably wouldn't meet the donor's income needs.
Some charitable remainder trust strategies
Another benefit of the charitable remainder trust is that the trust itself usually doesn't pay any tax on the income and capital gains that its assets generate. Income beneficiaries can pay tax on the distributions they receive, but the trustee has some flexibility in determining how that income gets taxed.
This tax benefit leads to some useful strategies. For instance, many donors use stock in which they have large unrealized capital gains to fund their charitable remainder trust, avoiding the tax hit they'd take if they sold shares in their own taxable accounts. After the transfer to the trust is complete, the trust can sell the appreciated stock and invest in a more diversified portfolio, with the tax impact getting spread out over many years.
Moreover, charitable remainder trusts don't require a huge amount of charitable intent. The IRS requires that in order to claim a tax deduction for the trust transfer, a charitable remainder trust must have a remainder interest with a present value of at least 10% of the total assets in the trust at the time of the gift. If things end up working out so that the charity receives less than this amount, that's not a problem -- the assessment is made at the initial formation of the trust. As long as you meet this requirement, you can set the payouts anywhere between 5% and 50% of the trust's value.
If you want to make gifts to charity but need the income from your assets during your lifetime, a charitable remainder trust can be a great way to balance those needs and achieve both of your goals. These trusts are complex enough to need professional assistance, but most major charities will be able to assist you in structuring a trust that will help them achieve their charitable mission while giving you a financial benefit as well.