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Charitable Remainder Trusts: Accounting Strategies for Success

Charitable Remainder Trusts: Accounting Strategies for Success

April 23, 2024

Charitable remainder trusts (CRTs) can be complex to start and fund, so it’s essential to do it right the first time and yield long-term results for you and your beneficiaries. Working with a professional can help you maximize your charitable remainder trust accounting strategies, generating more revenue and bigger donations to the charity of your choosing.  

Keep in mind that your strategy for managing your charitable remainder trust may vary depending on whether you fund a charitable remainder annuity trust (CRAT) or a charitable remainder uni-trust (CRUT). CRATs do not permit you to continue funding the trust into the future while CRUTs have a little more flexibility in this area. 

As a result, you should be well aware of the advantages of each trust before you sign on the dotted line to fund your new CRT. 

Once you have some of these questions resolved, you can look at more charitable remainder trust accounting strategies to maximize your assets through good timing and comprehensive financial planning. 

Have an Asset Funding Strategy

The first thing you can do to set your trust up for success is strategically invest it in a variety of assets. Investing a charitable remainder trust in diversified assets reduces your overall risk and helps generate more predictable income during trying times. 

You can also contribute highly appreciated assets which can then be sold without immediate capital gains tax. For example, you can avoid any capital gains tax on the sale of real estate within the trust.  

While you may be tempted to fund a trust with your most valuable assets, it’s crucial to know that you may lose access to the asset once it is transferred into the trust. This is particularly true for many real estate assets such as vacation homes or second homes that you might still choose to occupy from time to time. 

Optimize the Payout Rate

When setting up the details of the trust, you should be realistic about what the payout rate should be, especially if you are interested in making this a source of income for the long haul. 

If you set the payout rate too high, you will run out of funds much faster than you may have anticipated. This can spell disaster for you or a beneficiary if you are relying on that income source. 

On the other hand, you could set the payout too low to be truly effective at helping a beneficiary. The law requires that your payout rate be at least 5%, but this may be too low in some cases. While the trust may last for longer, your beneficiary will get less benefit from the trust if you keep the purse strings too tight when it comes to distributions. 

Time Your Contributions

The best thing you can do to minimize what you owe the federal government on your estate is to maximize the tax advantages of founding a charitable remainder trust. Choose carefully when it comes to setting up the CRT and taking the charitable deduction. Not only can you write off some of these contributions, but you can also maximize interest rates by investing wisely. You may even find you can minimize your tax liability by establishing the CRT in a certain year depending on your expected income.

This also plays a role when you add assets to a charitable remainder uni-trust if you will continue to allocate more assets into the trust over time. In a CRUT, there is less emphasis on the interest rate compared to CRATs. In part, this is due to the variable payout amounts that accompany this type of trust. 

Coordinate with a Larger Plan 

While a trust can certainly be a great investment vehicle on its own, you need to strategize with every part of your wealth planning. This means that your estate planning and long-term financial planning should all align with the goals you set for your CRT. You should not set up a trust in a vacuum.  

Instead, work with a team of professionals who can maximize your contributions and assets. All aspects of your financial team should work together: financial, tax, and legal experts are all important members of the team when setting up a CRT. 

Magellan offers all of these professionals under one roof so that you can take advantage of our services without having to coordinate multiple offices. Allow us to be your one-stop shop when it comes to setting up your new charitable remainder trust.

Review and Reassess Regularly 

Most of the time, setting up a charitable remainder trust is not a one-time deal. Changing market conditions and new tax laws can impact your goals and plans. This is why it pays to work with a professional who stays abreast of all changes and their implications for your wealth planning. 

You should prioritize keeping tabs on what the government and IRS have to say about the state of trusts to ensure your beneficiaries get the intended benefits. 

This also means that you need to review the performance of your trust at regular intervals and take into account your overarching investment strategy. While you can keep tabs on performance on your own, it is recommended that you review all strategic moves with a professional before deciding to alter your course. 

Let Magellan Help You Plan a Charitable Remainder Trust 

If you are interested in creating a charitable remainder trust or modifying an established trust, consider enlisting Magellan’s help. We provide you with comprehensive estate, financial, legal, and tax planning so that you can make the most of your wealth for decades to come. 

Everything you need is available under one roof when you partner with us. Reach out to Magellan today to learn more about how we can assist you with your trust! 

 

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.

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