Charitable remainder trusts are irrevocable trusts that let you donate assets to charity and draw annual income for life or for a specific period of time.
How a Charitable Remainder Trust Works
In a charitable remainder trust, a donor transfers property, cash, or other assets into an irrecoverable trust. It’s important to remember that assets going in can’t be taken back. The trust pays income to at least one living beneficiary, and payments can continue for a specific term up to 20 years or the life of one or more beneficiaries. At the end of the payment term, the reminder of the trust passes to one or more qualified U.S. charitable organizations. The reminder donated to charity must be at least 10% of the initial net fair market value of all property placed in the trust.
Reasons to Create a Charitable Remainder Trust
Charitable remainder trusts can offer many benefits, including planning major donations to charities of your choosing, providing a predictable income for life or over a specific time, allowing deferral on income taxes on the sale of assets transferred to the trust, and a partial charitable deduction based on the value of the charitable interest in the trust.
Types of Charitable Remainder Trusts
There are 2 types of charitable remainder trusts based on how they pay beneficiaries. Both types of trusts can be made while the donor is alive (inter vivos) or upon death (testamentary).
1. A Charitable Remainder Annuity Trust (CRAT)
A CRAT allows the grantor to make a charitable gift and receive an income stream from it. The CRAT must pay out a fixed dollar amount every year to the grantor. The amount must be equal to or greater than 5% of the value of the trust, regardless of how much income was actually generated. The donor receives a charitable income tax deduction for the present value of the charity’s remainder interest in the year the trust is funded.
2. A Charitable Remainder Unitrust (CRUT)
A CRUT guarantees the grantor at least a 5% payout. Unlike a CRAT, the CRUT payout is based on the actual value of the assets in the trust, not the beginning value. This means that the yearly income can fluctuate for those who use a CRUT, which may serve as an inflation hedge. Similar rules regarding terms of payments, charitable income tax deductions, and remainder requirements apply to CRUTs and CRATs.