Estate planning doesn’t have to focus solely on what happens to your assets once you die. In fact, if you have significant assets, your estate plans should also include strategies to minimize potential financial drains – including excessive taxation.
This is where a charitable remainder trust (CRT) may come into play. CRTs are irrevocable trusts that can allow you to create an income stream for your beneficiaries for a set period while reducing the taxes on your estate. It also permits you to generously support a cause you believe in – which secures your legacy far into the future.
How do CRTs work?
There are two main types of CRTs: charitable remainder annuity trusts and charitable remainder unitrust. The former provides fixed annual payments to the trust’s beneficiaries, while the latter provides payments based on a fixed percentage of the trust’s value, recalculated annually.
Key features of CRTs include:
- Since they are irrevocable, they offer significant protection against creditor claims and may not be subject to division in a divorce.
- As the grantor, you can name yourself as the beneficiary (or one of the beneficiaries) of the trust, so that you can benefit from the income it provides.
- Appreciates assets (such as real estate and certain investments) held by the CRT can be sold without incurring capital gains. The proceeds can then be reinvested into the trust, increasing its overall value.
- The assets in the trust are removed from your estate, so that has the potential of lowering the taxes on the estate – leaving more money for your beneficiaries after you die.
- The trusts are often tied to the lives of the primary beneficiaries, whether that is you, your children or someone else. Only once the primary beneficiaries are gone will the remainder of the trust’s assets be given to charity. This allows you to be philanthropic without putting your financial security or the financial security of your loved ones at risk.
There are many different trusts available for use. Discussing your goals with someone familiar with the options can help you decide what’s right for your needs.