Charitable Trusts

Courtney Jones, CFP®
Posted on 
September 23, 2021

Leaving a Legacy with Charitable Trusts

Oftentimes our clients feel conflicted about competing goals when it comes to the wealth they will leave behind. They mostly want to be able to continue to protect the people that they love, but when philanthropy is part of their mission, they may want to leave a legacy as well. There is an estate planning tool that can accomplish both objectives and provide tax advantages at the same time.

Charitable Remainder Trusts

Charitable Remainder Trusts (CRTs) allow you to donate to the charity of your choice while provisioning for a noncharitable beneficiary, such as the creator of the trust or any named individual or group. A central idea of a charitable remainder trust is to reduce taxes. The charity pays you or whoever you designate for a specific time period determined by you. Upon your death or at the end of the designated time period the property goes to the charity. No federal tax is due on the property donated to charity.

Federal estate taxes can be avoided with CRTs because the appreciated property is removed from the estate. Because it is donated to a tax-exempt charity, the sale of the assets is not subject to capital gains taxes. For assets that have appreciated substantially, this can be a way to monetize the asset to the maximum extent and then create an income stream with the proceeds, leaving behind the remainder to fund a legacy for the charity.

It is important to point out that CRTs are irrevocable, meaning that once tax relief is granted for the sale of an asset, the relief cannot be revoked. The asset is also protected from claims by creditors since the asset is no longer in the donor’s books.

Income Stream

Once a CRT is created, the property is transferred to the trust and its value is determined. The annual income stream paid out to the beneficiary of the trust can be either a fixed percentage of the value or a fixed dollar amount. Charitable remainder annuity trusts, or CRATs, distribute a fixed annuity each year. Charitable remainder uni-trusts, or CRUTs, distribute a fixed annual percentage based on the balance of the trust assets, that is, the percentage remains the same, but the amount of the annual payout can move up or down, tied to increases or decreases in the value of the principal assets. Another difference is that CRATs do not allow for additional contributions, while CRUTs do permit this.

The terms of termination of your trust are determined by the trust document, and when this happens, the remainder of the trust’s assets are then transferred to charity. Note that the IRS dictates that the charitable organization must receive at least 10% of the initial donation you made to the trust.

As with most estate planning tools, there is a level of complexity and changing regulations can affect your estate plan. When it comes to passing down wealth, it is important to ensure that the assets are properly transferred and that your goals are carefully considered.

Charitable Trusts

Courtney Jones, CFP®
Posted on 
September 23, 2021
Charitable Trusts

Leaving a Legacy with Charitable Trusts

Oftentimes our clients feel conflicted about competing goals when it comes to the wealth they will leave behind. They mostly want to be able to continue to protect the people that they love, but when philanthropy is part of their mission, they may want to leave a legacy as well. There is an estate planning tool that can accomplish both objectives and provide tax advantages at the same time.

Charitable Remainder Trusts

Charitable Remainder Trusts (CRTs) allow you to donate to the charity of your choice while provisioning for a noncharitable beneficiary, such as the creator of the trust or any named individual or group. A central idea of a charitable remainder trust is to reduce taxes. The charity pays you or whoever you designate for a specific time period determined by you. Upon your death or at the end of the designated time period the property goes to the charity. No federal tax is due on the property donated to charity.

Federal estate taxes can be avoided with CRTs because the appreciated property is removed from the estate. Because it is donated to a tax-exempt charity, the sale of the assets is not subject to capital gains taxes. For assets that have appreciated substantially, this can be a way to monetize the asset to the maximum extent and then create an income stream with the proceeds, leaving behind the remainder to fund a legacy for the charity.

It is important to point out that CRTs are irrevocable, meaning that once tax relief is granted for the sale of an asset, the relief cannot be revoked. The asset is also protected from claims by creditors since the asset is no longer in the donor’s books.

Income Stream

Once a CRT is created, the property is transferred to the trust and its value is determined. The annual income stream paid out to the beneficiary of the trust can be either a fixed percentage of the value or a fixed dollar amount. Charitable remainder annuity trusts, or CRATs, distribute a fixed annuity each year. Charitable remainder uni-trusts, or CRUTs, distribute a fixed annual percentage based on the balance of the trust assets, that is, the percentage remains the same, but the amount of the annual payout can move up or down, tied to increases or decreases in the value of the principal assets. Another difference is that CRATs do not allow for additional contributions, while CRUTs do permit this.

The terms of termination of your trust are determined by the trust document, and when this happens, the remainder of the trust’s assets are then transferred to charity. Note that the IRS dictates that the charitable organization must receive at least 10% of the initial donation you made to the trust.

As with most estate planning tools, there is a level of complexity and changing regulations can affect your estate plan. When it comes to passing down wealth, it is important to ensure that the assets are properly transferred and that your goals are carefully considered.

Registered Representative of Sanctuary Securities Inc. and Investment Advisor Representative of Sanctuary Advisors, LLC. Securities offered through Sanctuary Securities, Inc., Member FINRA, SIPC.  Advisory services offered through Sanctuary Advisors, LLC., an SEC Registered Investment Advisor. Credo Wealth Management is a DBA of Sanctuary Securities, Inc. and Sanctuary Advisors, LLC. This work is powered by Seven Group under the Terms of Service and may be a derivative of the original. This communication has not been reviewed for completeness or accuracy, does not necessarily reflect the views of Sanctuary Securities, Inc. or Sanctuary Advisors, LLC., and is not a recommendation or endorsement of any product, service, or issuer. For additional information, please refer to one of the following consumer websites: www.FINRA.org, www.SIPC.org.

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