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Charitable Remainder Trusts
A charitable remainder trust is a trust arrangement where a donor irrevocably transfers assets to a trustee who will pay income to the donor (or someone else chosen by the donor) at least annually. The trust can run for the lifetime of the income beneficiary(ies) or for a specified number of years (up to 20). Assets then pass to the charity.
How do charitable remainder trusts work?
The donor transfers assets to a trustee (which can be the charitable organization, a bank or other professional manager and in some cases, the donor). The trustee will manage and invest the trust assets and make the required payments to the income beneficiary. The payout to the income beneficiary can be either a fixed dollar amount (annuity trust) or fixed percentage (unitrust). Since the trust is a tax-exempt entity, the trustee can manage, invest and reinvest the trust assets without incurring capital gain taxes on behalf of the trust. Remainder interest (based on actuarial determination of life expectancies of beneficiaries of income) cannot be less than 10% of the value of the assets transferred to the trust.
Benefits of a charitable remainder trust
- Income for life of donor or others or specified number of years.
- Donor may be able to increase his or her income through the trust (making this an attractive retirement planning option.)
- Donor may be able to "unlock" income from assets (such as real estate) which now produces little or no income.
- Annual payout may be taxed favorably to income beneficiary.
- Donor can use appreciated assets (such as stock or real estate) to fund the trust and will usually avoid the capital gains tax on the appreciation.
- Trust will provide management of assets - so the donor need not worry about investments.
- Donor is entitled to charitable income tax deduction for value of the trust assets that will go to the charity when the trust terminates.
- Donor may also save estate taxes because of the trust.
- Donor can make a major gift to charity.
The minimum amount to establish a charitable remainder trust is $50,000 and the minimum age of the income beneficiaries is 50.