One of the greatest joys in life is giving back to the people and causes you cherish most. It's a great way to spread positivity and make a meaningful impact in the world. A strategic way to make a charitable impact with your assets is by establishing a charitable remainder trust (CRT).
While CRTs are set up with the express purpose of giving, they also can provide an income stream to you or your loved ones. Read on to learn about how charitable remainder trusts work and the various options available to you.
What is a charitable remainder trust?
A charitable remainder trust is a trust designed for both giving assets to charity and receiving income during your life. You fund the trust by adding assets such as cash or liquid investments, or, in some cases, real estate, business interests or other illiquid holdings. You may qualify for a tax deduction in the year that you add assets to the trust.
During your life, the trust pays out income from the assets you added to it. This income can help you meet living expenses or pursue financial goals. If you don't need the income yourself, you can choose someone else to receive the payments (e.g., a spouse, a child or anyone else of your choosing).
You can select one or more tax-qualified charities to receive the remainder interest. After you pass or the specified term ends, any remaining assets in the trust will automatically go to your designated charity.
You also can choose to have the funds paid to a
Benefits of a charitable remainder trust
Charitable remainder trust contributions may be eligible for a tax deduction
When you fund a CRT, you may be eligible for a tax deduction for the year in which you complete the transfer. That's true even though the charity might not receive the remainder interest for years or decades. And if you can't use the entire deduction in the year you give, you may be able to carry the deduction forward for five additional years.
The amount of your deduction depends on several factors. Speak with a tax professional to understand how the strategy might look on your tax return. While Thrivent does not provide specific legal or tax advice, we can partner with you and your tax professional or attorney.
Additional tax benefits include:
- They help manage capital gains. In some cases, a CRT can be a powerful tool for managing capital gains. When you fund the trust with assets that have experienced long-term appreciation, you may be able to avoid immediate taxation on the gains when the trust sells assets. That said, payments you receive could be taxable in various forms—but you might benefit from spreading the income out over multiple years, and your financial advisor can help illustrate how that works. By avoiding immediate taxes, you can maximize the assets in the trust. That's important because those assets provide income payments, and you may want to leave as much as possible for charity.
- They can reduce your estate size. CRTs are irrevocable trusts, and when the trust ends, your estate generally will receive an estate tax deduction. With a smaller estate, you might be able to reduce estate taxes and probate costs, but check with your tax professional and attorney to discuss the details.
Charitable remainder trusts provide income payments to you or loved ones
A CRT pays income that can go to you, a spouse or anyone else you choose. Depending on your needs, you can establish a stream of payments designed to last for life or a term of up to 20 years, or in some circumstances, the trust can pay for your lifetime and continue to pay for a term of years to loved ones after your death—it's up to you. Those payments can offset the reduction in assets from your gift to the CRT, helping you get value out of assets that ultimately go to charity.
Types of charitable trusts
Two of the most common types of charitable remainder trusts are charitable remainder annuity trusts (CRATs) and charitable remainder unitrusts (CRUTs).
1. Charitable remainder annuity trust
A CRAT pays out a fixed amount each year, although you can set up monthly or quarterly payments (for both CRATs and CRUTs) if you prefer. While you can get a predictable stream of income, the trust's funds could run low, requiring you to make unwelcome adjustments if that happens. CRATs allow you to make a single transfer into the trust, and subsequent transfers aren't allowed.
2. Charitable remainder unitrust
A CRUT pays out a percentage of the trust's assets each year. The payout must be between 5% and 50% of the total assets, and people often choose a rate near the lower end of that range. With a CRUT, beneficiaries can potentially get a rising income stream if the trust's assets gain value each year, but if the assets decline, the payments could shrink.
Other types of CRTs exist, and they might make sense depending on your situation. Your team of estate attorneys, tax professionals and financial advisors can help you understand which option is best.
Is a charitable remainder trust right for you?
Now that you know the basics of CRTs, consider your situation and goals to decide if a CRT is an appropriate solution. These vehicles might make the most sense when you have a desire to:
- Give assets to a charitable cause
- Provide income for yourself, a spouse or others
- Potentially get an immediate tax deduction and use other
- Manage long-term capital gains
- Reduce the size of your estate
That said, transfers to a CRT are irrevocable, so you need to be willing to give up control of assets. However, the potential tax savings and income payments might offset any anxiety about giving away assets. Plus, you're using your resources to give back, which can feel wonderful and life-fulfilling.
To explore these topics in more detail, connect with a local