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Charitable remainder trusts: guaranteed income plus a tax break

These days, a lot of people are looking for ways to shield their assets from taxation. One way you might consider is by setting up a charitable remainder trust. This type of trust can provide up to 20 years of guaranteed income for you or a loved one, and then the remaining assets go to a charity of your choice. What’s more, you may even save on taxes by funding your trust with appreciated assets.

A charitable remainder trust is considered a “split interest” vehicle. That is to say, more than one party has a beneficiary interest in the trust. The first party – you or your chosen beneficiary – is entitled to a stream of income from the trust for up to 20 years. The second party is a charitable institution, which receives the balance of the trust assets once the 20 years have passed.

Depending on the precise way the trust is structured, your income stream could be a fixed annuity or a percentage of the income on the trust assets. There are two main types of charitable remainder trusts – charitable remainder annuity trusts (CRATs) and charitable remainder unitrusts (CRUTs). Both are irrevocable trusts.

The way this works is typically that you work with a qualifying charity to set up either a CRAT or CRUT. You donate cash, stocks or other assets to the trust, and this is partially tax deductible because it’s a gift to charity. However, if the assets you donate to the trust have appreciated over time, the fact that you donate them could result in a substantial capital gains tax cut, too.

The assets you donate to the trust will begin earning income once they are invested, and it is this income that goes into the beneficiary stream. Depending on how you set up the trust, you or your beneficiary could receive payments annually, quarterly or monthly. However, the amount of income you receive in the income stream can’t be more than a specified amount of the overall asset value. For example, the IRS says that the annual annuity from a CRAT must be at least 5% but cannot be more than 50% of the trust’s assets.

The income stream you or a beneficiary receives from a charitable remainder trust is taxable.

Once the specified time period (at most 20 years) has passed, the remaining trust assets become entirely the property of the charity.

A charitable remainder trust could be for you

If you are looking for a way to cut your capital gains taxes, donate to charity and create a long-term income stream for yourself or a loved one, a charitable remainder trust could be just the ticket. Talk to an attorney experienced with asset protection today.