Our mission at Legacy is to bless the whole world by delivering the promise that inspires charitable giving. Legacy offers resources to recipient organizations to increase the charitable impact of each dollar given. To do so we use what is called planned giving. Planned giving is utilizing charitable planning and gifting to maximize a donor’s benefit. Planned giving is the fastest growing segment of philanthropy in America today.
One type of planned giving is a charitable remainder trust. A charitable remainder trust can be beneficial in tax and estate planning. A charitable remainder trust divides the funding asset into two equal parts: one part you retain and the other part is a charitable donation. During your lifetime, you receive income. After your death, the remaining assets fund your family foundation (Donor-Advised fund) at Legacy. If you own a taxable estate, desire a more fixed income, or have a charitable intent and giving priorities then planned giving, or having a charitable remainder trust, is something you should look into. The benefits include safeguarding the family estate, eliminating or reducing capital gain and estate taxes, and it creates a family legacy by enhancing giving substantially.
In this blog post I’m going to cover the following:
1.) What a charitable remainder trust is and how it works
2.) Charitable remainder trust distribution rules and payouts
3.) If taxes can be withheld from payments
4.) Beneficiaries of a charitable remainder trust
5.) Are there limitations on which financial properties a charitable remainder trust may invest in?
What is a charitable remainder trust and how does it work?
A charitable remainder trust (CRT) is part of planned giving. It’s a trust set up by a donor who receives income for life from the trust and at death the remaining assets go to charity. The assets in the trust are invested as instructed by the donor and a set percentage of whatever is in the trust, is paid to the donor annually. Legacy provides the trust agreement and administers the trust (annual filings, tax returns, etc.) for 1% of gross assets annually.
Charitable remainder trust distribution rules and payouts
With a charitable remainder trust, the donor must pay tax in the income stream, which is categorized into four tiers:
Ordinary income and qualified dividends
Capital gains (short-term, personal property, depreciation, long-term gain)
Other tax-exempt income
Return of principle
If the charitable remainder trust is funded with cash, the donor can use a charitable deduction of up to 60% of adjusted gross income (AGI); if appreciated assets are used to fund the trust, up to 30% of their AGI may be deducted in the current tax year. The frequency of payout cannot change when the trust is valued. The payout schedule can change (monthly, quarterly, bi annual, or annual). Payout rates do not change due to the effect this has on the deduction when the charitable remainder trust is set up.
If the trust earns more income than paid out it doesn’t owe taxes on the excess. Since the charitable trust is tax-exempt, the only income to beneficiaries are taxed as income tax and you would include that income in your personal taxes. Beneficiaries can choose to donate the income to a donor-advised fund for an additional tax deduction and not receive any tax liability on a year-by-year basis.
Can taxes be withheld from payments?
No, taxes cannot be withheld from payments. Recipients pay the K1 on personal tax returns, unless the income is donated before the income is received.
When you receive your tax deduction at the beginning of your charitable remainder trust you can spread that deduction over a total of six years, or you can take it all at once. We advise you to meet with your tax professional to discuss what’s best for you.
Beneficiaries of a charitable remainder trust
A frequently asked question is can you change the beneficiary of a charitable remainder trust? You may change the charitable beneficiary during your life, but it is best to give an independent trustee this power.
Another commonly asked question is how many beneficiaries can a charitable remainder trust have? While the owner may only have one beneficiary in mind when creating the charitable remainder trust, he or she doesn’t have any limitations in how many recipients of trust payments exist. The number of trustors may remain restricted if also receiving income from the trust.
Some people have specific charities in mind and they may have 3-5 depending on how big the charitable remainder trust is at the end of its life. Donor-advised funds are good to incorporate with charitable remainder trust’s because charities can suffer “mission drifts” where they are no longer supporting their original missions- so advisors can advise which charities get what and when. When funds move from a charitable remainder trust to a donor-advised fund, and it’s funded, now you can give to specific charities and specific causes as a family. Having a donor-advised fund simplifies things - they have all the funds go to the donor-advised funds and have the successor donors take care of where the funds should go.
Limitations on which financial properties a charitable remainder trust may invest in?
Limitations include no debt, no margin, and no leverage. Funds cannot be invested in a family organization. This would cause private inurement.
Through a charitable remainder trust you can save tax dollars, secure an income, provide for and prepare future generations, and build a charitable living. Legacy can help you get more when you are selling property or managing other taxable events.
If you have questions or concerns regarding charitable remainder trusts please reach out to us. Also, check out other articles on charitable remainder trusts, donor-advised funds plus other resources! Additional Resources: Donor-advised fund guide Lifetime Income with charitable remainder trusts How do charitable remainder trusts work?