Nobody knows when it will be time for life to end. Although it may not be a pleasant thing to think about, it is important that you do what is necessary to prepare your estate to be administered upon your death. You will want to make sure your loved ones are taken care of. This means creating a comprehensive estate plan based upon your specific objectives.
There are usually multiple goals when people are formulating their estate plan and determining how they want their assets to be distributed after they pass away. You may not only want to make sure your heirs are taken care of, but you should also think about tax implications as well as possible charities and causes you want to support. A charitable remainder trust is an estate planning vehicle that allows you to address all these objectives.
How does a charitable remainder trust work exactly?
An irrevocable trust that is tax-exempt, a charitable remainder trust, is meant to minimize tax liabilities by decreasing taxable income. The charitable remainder trust does this by distributing assets first to beneficiaries for a specific length of time. Upon the end of this specified period the capital remaining in the trust will be donated to a particular chosen charity.
A charitable remainder trust is known as a “split-interest” estate planning vehicle. The trustor can contribute to the trust, obtain tax deductions, and donate the remaining assets to a cause he or she cares about.
A charitable remainder trust is irrevocable which means that the trust is not modifiable without the permission of the beneficiary. Essentially, once the trustor contributes assets into the trust, he or she will have no ownership rights over those assets. On the other hand, a revocable trust allows the trustor to make changes to the trust. Therefore, if you prefer a revocable trust, perhaps choosing a charitable remainder trust may not be your best choice.
Two types of charitable remainder trusts
There are two different types of charitable remainder trusts you can choose from. Each type will distribute assets to beneficiaries differently.
A charitable remainder annuity trust, otherwise known as a CRAT, will distribute funds to the beneficiary through a fixed annuity payment on a yearly basis. Alternatively, with a charitable
remainder uni-trust, referred to as a CRUT, a fixed annual percentage of the current balance of the trust is distributed. You should be aware that CRUTs do not allow for the trustor to make additional contributions while CRATs do.
Should you use a charitable remainder trust?
Your estate plan should ideally conform to your financial situation, circumstances, and objectives. It is a good idea to step back and do a comprehensive analysis of your financial situation so you can see what is possible as far as contributing to your favorite charity or cause. Talking to a professional financial advisor can help you determine if a charitable remainder trust could work for your estate planning and philanthropic goals.
Any opinions are those of the author and not necessarily Raymond James. Any information provided is for informational purposes only and does not constitute a recommendation. Prior to making an investment decision, please consult with your financial advisor about your individual situation. While we are familiar with the tax and legal provisions of the issues presented herein, as Financial Advisors of RJFS, we do not provide advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.