How do Charitable Remainder Trusts Work?

On Behalf of | Nov 3, 2022 | Estate Planning

Leaving a gift to a charitable organization may very well be a crucial goal for you as you develop your estate plan. Establishing a trust could be one way to accomplish this, but there are several different options to consider. One such option is a charitable remainder trust (CRT).

What is a CRT?

Broadly, a CRT is an irrevocable trust you can create to donate assets to charity while also continuing to draw an income for yourself and/or another living beneficiary.

If you want to create a CRT, you would transfer appreciated assets like stocks, real estate and currency to the trust. This means you are no longer the owner of the asset, which can have significant tax benefits, including an immediate charitable deduction, and protect the assets from third-party seizures.

The trustee can then sell the appreciated assets (without having to pay capital gains tax) and reinvest proceeds into an investment that produces an income.

At the end of the beneficiary’s life—or another chosen time period of up to 20 years—the remaining assets in the trust would pass to a qualified charitable organization(s).

Keep in mind that this type of trust is irrevocable, which means you cannot change or end it once you create it. However, it can ensure that you have a steady income stream for a certain number of years or the rest of your life.

Should I create a CRT?

The answer to this question is: it depends. A CRT may be worth discussing if you want a predictable income or have ambitions to make significant donations to charity.

Having said that, it may be wise to explore other estate planning options with an attorney if you do not have an appreciated asset or would rather leave assets to specific people rather than eligible charitable organizations.

Whatever you ultimately decide, understanding the benefits, limitations, and process of setting up different types of trust can help you make critical estate planning choices.