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What Is a Charitable Remainder Trust?


Trusts serve many functions in estate planning. One is to ensure assets do not go through probate after a person dies. But trusts can also help you save on your taxes while you are alive. A good example of this is a charitable remainder trust, which is a special type of estate planning trust that allows you to support your favorite charity while continuing to provide for yourself and your heirs.

How a Charitable Remainder Trust Works

A charitable remainder trust is a fairly complex trust, but the basic idea is simple: You donate assets to a charity, which serve as the trustee. The trustee then pays you a certain amount of income from the trust each year. After a certain period of time–either your death or a specified number of years–the remainder of the trust then goes to the charitable trustee.

Of course, this is a highly simplified explanation of how a charitable remainder trust works. Here’s a bit more detail. There are actually two basic types of charitable trusts:

  • In an annuity trust, you receive a fixed amount of money from the trust each year. For example, let’s say you fund a charitable remainder trust and state that each year, the trustee will pay you $15,000. You are guaranteed this amount of money each year regardless of any change in the value of the trust’s assets.
  • In a unitrust, you receive a fixed percentage of the trust assets each year, as opposed to a fixed amount of money. In other words, instead of saying the trust will pay you $15,000 each year, the trust pays you 7 percent of the then-current value of the trust’s assets. The trust is revalued each year, so this means the amount you actually receive will vary with the trust’s performance.

The Tax Benefits of a Charitable Remainder Trust

So why bother with a charitable remainder trust in the first place? The biggest reason is it can cut your tax bills while you are still alive. You probably know that you can deduct charitable gifts on your income tax return. The same is true of charitable remainder trusts, except that the deduction is spread out over five years. The deduction is also limited to the net benefit the charity receives. So if you donate $100,000 in assets to a charitable remainder trust, but expect to get $20,000 back in income during the life of the trust, then you can only take an income tax deduction of $80,000.

In addition, assets placed in a charitable remainder trust are not subject to capital gains tax. This makes charitable remainder trusts an attractive option for individuals who own property like stocks and real estate that tend to increase in value over time. Say you purchased $10,000 in stock that’s now worth $50,000. If you simply sold the stock, you would owe capital gains tax on the $40,000 appreciation. But if you transfer the stock to a charitable remainder trust, and the trust sells it, there is zero capital gains tax owed.

Speak with a Florida Trust Attorney Today

A charitable remainder trust is not something to be done without careful consideration. A qualified Fort Myers estate planning lawyer can review your situation and help you decide what types of trusts are appropriate. Contact the Kuhn Law Firm, P.A., at 239-333-4529 to schedule a free confidential consultation with a member of our estate planning team today.

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