Charitable remainder trusts are irrevocable trusts that allow an individual to donate assets to charity while also drawing annual income either for the life of the donor or for a defined time period. As with other types of trusts, these may play an essential role in your comprehensive estate plan. Charitable remainder trusts offer a number of tax and other advantages that every individual should consider. However, creating the trust should be left to an experienced estate planning attorney.
If you have yet to develop your own estate plan or it has been a while since you reviewed yours, it’s time to speak with the Florida law firm of Verras Law. We can discuss charitable remainder trusts, how they work, and how they can serve your long-term estate planning objectives.
What Is a Charitable Remainder Trust?
A charitable remainder trust lets a person give to charity while also creating a stream of income. The trust is irrevocable, meaning that it cannot be revoked and the donor will have to relinquish legal ownership of the assets set aside for the charity. The charity will typically serve as the trustee, and in this role will be responsible for managing the trust assets and investing them to create income. The charitable remainder trust will pay a set amount of money to a designated individual on an annual basis.
The trust may continue in existence either for the life of the donor or for a predetermined period of time not to exceed 20 years. After it ends, the assets and property held by the trust will be turned over to the charity named in the instrument. What the charity receives is known as the remainder.
What Are the Benefits of a Charitable Remainder Trust?
There are several reasons to create a charitable remainder trust, including:
- Tax benefits: The tax advantages of the charitable remainder trust are one of its most attractive features. The donor may be able to lower their income tax obligation via charitable deductions and to defer capital gains taxes on appreciable assets.
- Income stream: Donors can receive regular income from the trust, either for the rest of their lives or for a set time period. This stream of income provides donors with financial stability and security. The income is especially valuable to individuals who are retired and on fixed income.
- Asset diversification: Having a diverse investment portfolio is an essential component of long-term financial planning. A charitable remainder trust is a great addition to that portfolio. By investing across different types of assets, the risks of market fluctuations and turndowns can be mitigated.
- Philanthropy: Giving to a charity is a wonderful way to make a philanthropic impact and leave behind a lasting legacy. Donors can not only support the causes they believe in while they are alive, but also after their passing since the charity of their choice will receive the trust remainder.
How Much Money Will the Trust Pay Me?
The amount of income produced by the charitable remainder trust will usually be either a fixed amount or a fixed percentage of the trust’s value each year. Many individuals select a fixed amount in case the value of the trust assets is lower than expected and generates less than expected income. However, once the amount is set and the trust comes into existence, the settlor (person who created the trust, or donor) cannot change the amount.
The settlor can set the amount of payment as high as they want, although there may be practical reasons to not set it too high. Higher payments equate to a lower income tax deduction. Payments may also begin to reduce the value of the trust’s principal, which may eventually leave nothing for the charity once the trust is terminated. The charity might not accept the donation if there is not much likelihood of it eventually receiving a remainder.
Instead of a fixed amount, you may wish to receive a percentage of the trust assets as payment. This can be done by selecting a fixed percentage of the current value of the trust property. The value of the assets will need to be appraised each year, but the percentage that the donor receives will remain the same. This approach may be more desirable than a fixed amount if you are not sure how inflation and other factors might affect the market. According to the IRS, the donor would need to receive at least 5% of the trust’s value every year.
Talk to an attorney about selecting an appropriate fixed amount or percentage as your income.
Contact Our Charitable Remainder Trusts Attorney
Setting up a charitable remainder trust can yield plenty of benefits, but it’s important to work with an experienced estate planning attorney. Our firm understands how to draft the trust instrument, the relevant IRS rules, and what you should expect with the charitable remainder trust. We can also help you decide how to set up your income stream, including the advantages and drawbacks of each strategy. Finally, we can advise you about other estate planning tools you should consider and help you make revisions to your plan if you already have one. Get started today by calling Verras Law.