Charitable Remainder Trusts

Description

An irrevocable trust that generates a potential income stream for you or your beneficiaries, with the remainder of the donated assets eventually going to one or more nonprofit organizations you select.

Key characteristics

  • Potential immediate (partial) tax deduction, based on the value of the eventual gift to charity
  • May eliminate capital gains tax for gifts of long-term appreciated securities
  • Accepts many types of assets
  • Income may be for life or for a fixed term of no more than 20 years
  • Requires setup and ongoing maintenance costs

Details

A charitable remainder trust (CRT) is an irrevocable trust typically funded with highly appreciated property. The CRT is structured so that there is a current beneficiary who is either the donor or a named individual and a remainder beneficiary, which is a qualified charity, such as a private foundation. The CRT can provide that the named beneficiary receive either a fixed amount each year or a percentage of the value of the trust each year, for a period of years that can be for the individual's life or for a period not to exceed 20 years. Since the designated charitable beneficiary could be a private foundation, a CRT is sometimes used to "fund" a private foundation while preserving the additional benefits provided by a CRT.

One of the major benefits of the CRT is an immediate potential income and gift tax deduction for a charitable contribution for the present value of the ending balance of the trust's assets designated for the charity. If the remainder beneficiary of a CRT is a private foundation, there are certain limitations to the amount of the deduction that can be taken, which are dependent on the nature of the property contributed.

Second, a CRT is exempt from tax on its investment income. Thus, a trustee of the CRT can sell the appreciated assets and reinvest the full proceeds. The donor is able to diversify from a concentrated position in a tax-efficient manner. When distributions are made to the donor or beneficiary pursuant to the terms of the trust, the donor or beneficiary must report a portion of the income and gains in respect to the property distributed. However, as the tax burden is spread out over time, more money is available for reinvestment within the CRT, benefiting both the lifetime beneficiary and charitable remainder beneficiary.

Third, a contribution to a CRT made at death under a Will can produce an estate tax deduction, not subject to any percentage limitations, with the value of the remainder interest passing to the private foundation.

Finally, a CRT can be an effective strategy for planning for retirement as the trust can provide that income distributions do not commence immediately. For example, the trustee can sell the appreciated assets, reinvest the proceeds, defer payment of tax and delay distribution (and income recognition) to the donor until he or she reaches age 65 and is in a lower tax bracket.


Comments

Tell us what you think about this article.
Please note that when you submit a comment, it may be posted here.

The views and opinions of third-party content providers are solely those of the author and not Fidelity Charitable. Fidelity Charitable does not guarantee the accuracy of the information provided by such third parties. Information provided is general and educational in nature. It is not intended to be, and should not be construed as, legal or tax advice. Fidelity Charitable does not provide legal or tax advice. Laws of a specific state or laws relevant to a particular situation may affect the applicability, accuracy, or completeness of this information. Federal and state laws and regulations are complex and are subject to change. Fidelity Charitable makes no warranties with regard to the information or results obtained by its use. Fidelity Charitable disclaims any liability arising out of your use of, or reliance on, the information. Consult an attorney or tax advisor regarding your specific legal or tax situation.