Understanding Charitable Remainder Trust
Donating part of your income to charities is one of the best ways to contribute towards society and feel
positive about yourself. A charitable trust gives you a benefit of a tax break now and after you have passed on.
Since the inception of the Charitable Remainder Trust law in 1969, many families have taken advantage of these
law to increase their income, save on tax and benefit charities for worthy causes.
What does a CRT do?
The greatest advantage of a Charitable remainder trust is a reduction of the income taxes during your lifetime
and estate taxes when you are gone. You are also not required to pay capital gains tax when you sell your
property. In the meantime, you get to help one or several charities that push a cause that you believe in and live a
good life without any tax worries.
How do you work with a CRT?
The entire process begins when you give up the control of your property to an irrevocable trust. Irrevocable
means that you cannot later change your mind when the trust is already operational.
After you have created a CRT, you transfer the property that you seek to donate to a charity. The IRS must
approve the charity that you choose. It should have the tax-exempt status under the IRS Internal Revenue Code.
The selected charity then becomes the trustee of your trust. It manages your property and ensures that there is an
income for you from the property. The charity will be paying a portion of the income that is generated from the
property for a specified number of years or lifetime as agreed in the trust document. At the end of the period that
you set, the charity will take ownership of the property.
Why should you consider a charitable remainder trust?
You can take an income tax deduction equivalent to the value of the property that you donated spread over
several years. The hard thing is to determine the amount of the deduction. A professional tax expert can help you
determine this figure. The IRS determines the value of the gift and then deduct the amount made from the
property over the time. You will then receive a portion of the property income. You still end up with a large
income tax deduction.
At the end of the period that you had agreed to be getting payments, the property changes ownership to the
charity. Therefore, it will not be subjected to estate tax by the IRS. If the assets were many, you would have
made enough tax savings.
Capital gains tax
You are required to pay tax on every appreciation in the value of your property. However, with a CRT, you can
turn the appreciation in value into cash without having to pay that capital gains on your profit.
In most cases, the selected charity will sell the non-income producing asset in the charitable trust and use the
proceedings to buy a piece of property that will bring you income. Fortunately, charities are not required to
capital gains tax. Therefore, the amount will be retained in the trust without being taxed at all.
How do you get income from the charitable trust?
There are two basic structure of getting your cash
You may decide to be getting a fixed dollar amount for the period that the charity will be a trustee of the trust.
You cannot change the agreement later even when there is inflation, or the property makes more money.
You can set as high amount as you wish. However, remember that setting a very high income reduces your
income tax deduction. You may also eat up the entire principal and be left with nothing to leave to charity by the
end of the period or death. The charity might not accept the gift especially if the entire value is paid back to you.
Percentage of the assets of the trust
The most common method is to ask for a percentage of the value of the property as your annual income. The
property is appraised yearly and the percentage sent to your bank. IRS has set 5 percent as the lowest amount
that you can receive from the property. If there is inflation, your annual payments can go up accordingly.
Seek the assistance of an attorney to help in the following areas
Setting up a charitable trust
There are several requirements that must be met in order for the IRS to approve your charitable trust. Failure to
meet these requirements is likely to cause loss of the benefits that you’re entitled. A lawyer will take you through
the legal steps required as well as make you understand the risks involved in the venture.
Identifying a credible charity
The selected charity will be in control of your property and will make all decisions on your behalf. Therefore, it
is important that you be careful when selecting it. Having been approved by the IRS is not enough proof that the
charity is credible. A lawyer will dig deep into the operations of the charity, professionalism, and performance in
the past. In the end, you will be sure that you are handing over your property to an organization that has the
adequate knowledge and that will give you adequate returns for the agreed period.
In addition, the lawyer can advise you on what to expect, the best way to earn from the property as well as
handle all the legal procedures that go with handing over your property to the charitable trust. Pick a lawyer who
is well-versed with the tax code so that he can help you tailor the trust as per your need.
A charitable remainder trust is an excellent way to enjoy reduced tax on the property as well as ensure that you
have a lifetime income all your life. There is also the additional advantage of not worrying about the
management of your property.