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6 Key Steps to Take When Setting up a Charitable Remainder Trust
For many people, leaving a legacy behind after they’re gone is one of their most important estate planning goals. Whether you want to leave a gift to an organization that’s made a difference in your personal life or that supports a cause you care deeply about, a charitable remainder trust offers a way to give back while also reaping potential financial benefits. Charitable remainder trusts can help you reduce estate taxes after your death and give you a dependable stream of income while you’re still alive. These trusts have specific rules and must be appropriately structured, and working with an experienced trust attorney is a key part of understanding this option and using it as part of your estate plan.
1. Understand Whether a Charitable Remainder Trust Is Right for You
A charitable remainder trust is an irrevocable trust that someone transfers assets to. Once the trust is set up, the assets are used to pay an income to a beneficiary. At the end of the trust’s term, the remainder of the trust goes to a designated qualifying organization. Charitable remainder trusts are often used in estate plans where someone has greatly appreciated assets, such as stocks or real estate, because they can help reduce or avoid certain taxes, such as capital gains.
However, it’s essential to understand that because charitable remainder trusts are irrevocable, they generally can’t be altered once created. An experienced estate planning attorney can help you determine if a charitable remainder trust fits into your estate plan or if another option, such as a revocable trust or direct gift, is more suitable.
2. Decide Between a CRAT and a CRUT
There are two main options to choose from when setting up a charitable remainder trust: a charitable remainder annuity trust (CRAT) and a charitable remainder unitrust (CRUT). The main differences are how they pay out and whether you can add more assets after establishing the trust.
A CRAT pays a fixed amount to the beneficiary every year. This doesn’t change based on the value of the trust’s assets. It also doesn’t allow for any additional contributions after funding. A CRUT, on the other hand, pays a percentage of the trust’s value to the beneficiary every year. This means that the income amount could increase or decrease depending on whether the assets appreciate or depreciate. A CRUT also allows for additional contributions, which means that you can increase the overall value of the trust and, therefore, how much is paid out each year.
3. Choose What Assets Will Be Part of the Trust
Once you’ve decided on the type of charitable remainder trust you want to use, you’ll need to designate assets to be transferred into the trust. Remember that this is an irrevocable trust, so ownership is transferred permanently, and you won’t be able to make changes if you change your mind later on. What assets you want to transfer to the trust is a personal decision, but many people choose to use this option for low-basis, highly appreciated assets, such as real estate that has dramatically gone up in value. An estate planning attorney can review potential assets and help you decide which are the best fit for the trust based on suitability and the potential tax consequences.
4. Name the Trustee and Beneficiaries
When you set up a trust, you must name a trustee to act as the administrator. The trustee’s duties also include managing the assets and ensuring tax compliance. Choose someone who understands the fiduciary duties involved and the legal and financial responsibility. It can also help to set up a successor trustee in the event the original trustee isn’t able to fulfill the duties.
A charitable remainder trust also requires at least one income beneficiary and at least one beneficiary for the remainder. The income beneficiary can be the person who set up the trust or someone else, such as a spouse or adult child. The charitable remainder beneficiary must be a qualifying organization that meets specific requirements, such as being designated tax-exempt.
5. Set the Income Payout Terms
When structuring the trust, you will need to determine how much the trust will pay out and for how long. If you are setting up a CRAT, you will choose a fixed amount. If you are setting up a CRUT, you will select a percentage. This needs to be determined carefully to ensure the remainder for the charity is at least 10 percent.
How the payments will be made can either be a set term of up to 20 years maximum or be based on the lifetime of the beneficiary. Which one of these is the better option depends on your goals and the value of the assets.
6. Work With a Trust Attorney
Charitable remainder trusts are complex and require strict compliance with federal law and the IRS. Working with a qualified attorney can ensure that the trust is drafted correctly, and they can help you coordinate with other professionals, such as accountants and financial advisors, so that you can make the most beneficial financial decisions. An attorney can also help if there are issues later on, such as trust litigation.
If giving back to a charity or other nonprofit organization is important to you, consider using a charitable remainder trust as part of your estate plan. At Yonano Law Offices, P.C., we can help you understand how this option works, determine whether it’s right for you, and help you set it up correctly to reflect your estate planning goals. Call our office at 916-894-8790 to speak to a member of our team to take the first step.
