Charitable Remainder Trust Attorneys Helping Plan Your Family’s Future in Cape Cod and The Surrounding Area
A Charitable Remainder Trust (CRT), also commonly referred to as a Capital Gains Avoidance Trust, is an important tool in estate planning. As the name says, it allows you to avoid capital gains tax on the sale of appreciated real estate. It can also be effective to avoid taxes on appreciated stock and other personal property. It constitutes a type of tax-exempt irrevocable trust designed to reduce the taxable income of an individual by distributing income to the trust beneficiaries for a set period of time, and donating the remainder of the trust to a designated charity.
There are a few benefits associated with setting up a Charitable Remainder Trust. Besides avoiding capital gain taxes on the sale of appreciated property, it offers the opportunity to generate a lifetime income stream and diversify your investment portfolio. You are also looking at potential savings on estate taxes and the ability to benefit a charitable organization of your choice. Because it is considered a split-interest giving vehicle, it allows a trust to make contributions, be eligible for a partial tax deduction, and donate the remaining assets.
How Does a Charitable Remainder Trust Work?
Charitable Remainder Trusts have tax reduction as a main goal. Trustors donate their assets to an irrevocable trust set up to pay a beneficiary over a set period of time, and then donate what is left to charities also named as beneficiaries. Because this type of trust is irrevocable, it cannot be modified and assets cannot be taken back without permission from the beneficiaries. Appreciated real estate can be sold by the CRT instead of by an individual. Because a CRT is a tax-exempt trust, it does not need to pay capital gains tax.
This is a strategy that provides possible tax savings, and it also allows the trustor to fulfill philanthropic goals and still generate income. It may also be beneficial for retirement and estate planning.
Are There Different Types Of Charitable Remainder Trusts?
Yes, there are two main types of CRTs you can choose from depending on your goals. The first one is called CRAT or Charitable Remainder Annuity Trust. This type of trust results in the distribution of a fixed annuity each year, i.e., it pays a fixed-dollar amount of the trust assets every year.
The second option is called CRUTs, or Charitable Remainder Unitrust and it also distributes a fixed annual dollar amount, but it is based on a percentage of the balance of the trust assets. It pays an amount equal to a percentage of the trust value at the beginning of the year, usually 5 to 8%.
In either one of these, most payouts are taxed to the beneficiary and labeled as ordinary income or capital gains. Donors receive a tax deduction for their gift based on current federal income tax rules. The amount of the tax deduction varies and is based on a formula that takes into consideration the donor’s age and the payout percentage he or she chooses.
How Do Recent Changes Affect Charitable Remainder Trusts?
The Secure Act of 2019 included a new ruling that affects IRA and 401(k) beneficiaries. Typically, IRA beneficiaries were able to receive RMDs (Required Minimum Distributions) each year. The new ruling states that non-spousal IRA beneficiaries need to withdraw all the funds in no more than 10 years following the death of the original owner. The 10-year withdrawal ruling applies to all accounting, including trusts. Anyone who has questions about how this ruling affects their accounts should consult a qualified professional to gain a clear understanding of all the latest rulings and updates that may apply to their situation.
How Can I Find Out More about CRTs and Decide If It Is Right For Me?
There are many complexities and rules involved in properly setting up a Charitable Remainder Trust as a key piece of your estate plan. If you think this is an option you would like to learn more about, the best next step is to consult an estate planning professional who is knowledgeable in the area of planned giving strategies. The Law Offices of Boyd & Boyd are available to help you explore whether this specific strategy is right for you, and if that is the case, we are equipped to customize a charitable trust arrangement that takes into consideration your personal, financial, tax, estate, and succession planning objectives.
Call us at (508) 775-7800 or stop by our Hyannis office to schedule a consultation with one of our attorneys.