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What is a Charitable Remainder Trust?

Estate Planners | Monday, February 14th, 2011

Passing along the wealth that you accumulate in your lifetime can be challenging. You naturally want to leave your beneficiaries and loved ones well-provided for, but you do not want to see your money taken by the government in the way of estate tax and other tax when you pass away. You may also wish to see a favorite charity benefit from your estate. One way to provide money for your charity and to generate income either for yourself or your non-charitable beneficiaries is by forming a charitable remainder trust. The charitable remainder trust is also a great tool for helping you and your heirs minimize your tax.

Generate Income Stream Now

Simply put, trusts allows for you to transfer your property and assets into a solitary group. A charitable trust allows your assets and property to provide you with income during your lifetime with ownership reverting to the charity after you pass away. The charitable remainder trust has two beneficiaries. In many instances, one of the beneficiaries is you or your spouse (or both you and your spouse), and the other is the charity or other tax-exempt organization that you wish to support or gift. During your lifetime, you will receive a certain percentage of income from the charitable remainder trust. When you die, the charity will receive the remainder interest (whatever is left). If your spouse also receives income from the trust and survives you, your spouse will continue to receive income, too, until the time that they pass away.

Control of the Trust

A main benefit of the charitable remainder trust is that in some instances you will be allowed to be the trustee of the trust, which gives you the power to make decisions in regards to the trust’s assets, including choices about investments and so forth. The charitable remainder trust is an irrevocable trust, but in some instances you can change the beneficiary of the trust if you wish to do so. This will allow you a certain level of personal freedom, especially if, after establishing the trust, you decide that a different charity is more worthy of the gift you want to leave behind.

The charitable remainder trust also allows you to choose the amount of income that you will receive from the trust each year. Under Internal Revenue guidelines, five percent of the value of assets within the trust must be distributed annually. You can choose to value these assets for distribution when the trust is funded or on a yearly basis. Many beneficiaries elect to take more, but it is usually advisable to take no more than ten percent of the value of the trust in distributions.

Tax Breaks

Another advantage of the charitable remainder trust is that the profit that is generated from the trust is not subjected to the capital gains tax, since you are benefiting your charity. The charitable trust can be exceptionally useful when it comes to assets that are highly appreciated but have limited potential for producing income. In avoiding capital gains taxation, more of your money will go to your charity and not the government. You can also get a deduction on your income tax because your charitable remainder trust supports a charitable cause. Nonetheless, please remember that income that is generated from assets in the trust (that you receive) is taxable.

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