Broker Check
5 Strategic Benefits of Charitable Remainder Trusts

5 Strategic Benefits of Charitable Remainder Trusts

December 28, 2023

Everyone wants to ensure that they make the most of their investments and protect their estate for their beneficiaries. A charitable remainder trust (CRT) is a clever way to take advantage of tax deductions, avoid probate, and support your charitable giving, among other things. If you have ever thought about what you could do to maximize your estate, you will want to learn about the benefits of a charitable remainder trust. 

Here are our top five reasons you might want to consider forming a charitable remainder trust as soon as possible. 

1. Tax Advantages 

The first and arguably one of the most important reasons to establish a charitable remainder trust is the opportunity to minimize tax spending. When you contribute appreciated assets to this trust, you can reduce the capital gains tax that you would often incur on the sale of these assets. For assets that have been depreciated, you can avoid the tax recapture AND avoid any other gain as well.

In a similar way, it also minimizes your gift and estate taxes because it immediately and permanently removes these assets from your taxable estate. 

In particular, this is a great way to contribute large-ticket items like real estate. Instead of selling the property outright, you can contribute real estate to a charitable remainder trust and sell it within the trust. You will not have to pay capital gains tax on the sale of the property. If you do not want to contribute the full value of the property to the trust, you can also split gifts and contribute just a portion to the trust. 

You can also take a partial tax deduction for your donation to a trust. Contributing assets to your trust makes them tax-exempt when you form it. Instead, beneficiaries will pay income taxes when they begin receiving payouts at some point in the future. 

Tax deductions on CRT donations are a little complex, but you can basically put them into two categories: cash donations and assets like real estate. If you decide to fund the trust with cash, you can take a deduction of up to 60 percent of your adjusted gross income. Assets allow you to take up to 30 percent of your adjusted gross income for the year. 

2. Charitable Giving 

Of course, one of the most important reasons why people will ultimately form this type of trust is that it allows them to support a cause they truly care about. Along with other types of charitable giving such as donor-advised funds, charitable remainder trusts allow you to make donations while also benefiting from tax advantages. You get to choose where the funds will be donated, allowing you to select a charity that means something to you personally. 

As long as you abide by the 10 percent rule, your charitable giving is advantageous. This rule requires you to donate at least 10 percent of the initial trust corpus to charity at the end of the trust term. Depending on the details of your unique trust, this could be a few years or even several decades in the future.  

Make sure you plan for this contribution because your trust will be disqualified by the service if you do not donate at least 10 percent of the initial value. 

3. Steady Income Stream

Another key reason to form a charitable remainder trust is for its steady income stream. It allows you to have predictable income for life or across a specific time period. The CRT payout rate can depend on a few factors, but these payouts can be made to a non-charitable beneficiary including yourself. This is a great way to ensure that you have money to cover your care later in life.  

However, some people will choose to leave a financial legacy for their loved ones in the form of this steady stream of income into the future. Instead of naming yourself the beneficiary, you can choose anyone else to receive the distributions from your CRT. These distributions could be considered taxable, but this is still one of the main benefits of forming a trust as it can make a real difference for your beneficiaries. 

4. Avoid Probate

Do you want your beneficiaries to be able to access your estate without having to go through an extremely lengthy probate? Trusts are powerful tools during estate planning because of how they can more clearly establish your wishes after your passing. 

Probate can take more than a year to sort out, especially if there are any contests to the will you laid out. Not to mention, probate costs can eat up a significant portion of your estate, extending to 7 percent or more. 

Plus, whatever your beneficiaries receive via the probate court will be public knowledge. If you were hoping for a little more privacy for your loved ones, you may choose to skip the probate process and put as much of your estate as possible into a CRT that can bypass the probate process. 

Take heed though, as there are other tools to bypass probate that do not include a charitable component. Consider these options carefully before making irrevocable gifts.

5. Protect Assets

Funding a charitable remainder trust is a great way to give yourself peace of mind that your funds are protected. Once a trust has been opened and funded with assets, it is completely irrevocable. That means that no matter what happens with your personal finances or the finances of your new beneficiaries, creditors cannot access the contents of the trust.  

Especially if you worry that a beneficiary will run up debt, a charitable remainder trust protects the funds of your hard-earned estate. It is a great layer of protection that you do not have when you choose to maintain your assets in your personal bank accounts and investment accounts. The funds will be fair game for creditors if they are not placed within an irrevocable trust or sheltered in some other way. 

Get Help Setting up a Charitable Remainder Trust 

Charitable remainder trusts can be a powerful tool during your estate planning when it comes to protecting your assets and offering financial security for yourself, your beneficiaries, and a charity of your choosing. 

Setting up a charitable remainder trust comes with its share of costs and complexities, and you will need a team of attorneys, tax planners, and financial advisors in order to best establish a trust according to your specific needs and situation. 

Rather than finding and coordinating these separate advisors yourself, Magellan Planning Group can handle everything for you. We offer coordinated legal, financial, and tax professionals all under one roof, working to avoid any gaps in your estate planning.

Contact us today to learn more about how we can help you with your financial future!

This material provided by Kevin Meaders and written by Axle Eight a non-affiliate of Magellan Planning Group and Cetera Advisor Networks LLC.

For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice.