Estate planning is a tricky process, but it doesn’t have to be overly complicated. If you would prefer to give money to a charity you care about rather than pay taxes, one of the simplest ways to accomplish this is with a charitable remainder trust. A charitable remainder trust (CRT) is an excellent vehicle to avoid taxes and provide a source of income for you and your beneficiaries while still giving generously to a charity of your choosing.
That said, you need to know how to set up a charitable remainder trust. It is not something you can set up on your own, and here is what you need to know about the process.
Decide on a Strategy
First and foremost, you need to determine if a charitable remainder trust is the right arrangement for you to meet your goals. Does it work well with your financial plan and even your retirement plan?
A charitable remainder trust is just one of many ways you can include charitable giving in your estate planning. It is one of the most popular options due to its inherent tax benefits, but it is far from the only option.
Some of the topics you might want to explore include:
- Charitable remainder trusts vs. charitable lead trusts
- Charitable remainder trusts vs. charitable gift annuities
- Donor-advised funds vs. charitable trusts
The best thing to do at this stage of the process is to work with a qualified financial planner who can take a comprehensive look at your finances and advise which path is best for you.
Set Up the Trust
Once you determine that a charitable remainder trust is the right arrangement for you, you must work with an attorney to complete the paperwork and set up the trust. It is beneficial to work with a company like Magellan since the setup of your CRT will include various areas of expertise, including legal, financial, and tax planning.
At this stage, you can decide on the details. Charitable remainder trusts are not a one-size-fits-all solution, so you will need to determine the type of trust, the payout rate, who will receive the payouts, which assets to put into the trust, and more.
You will also need to select a charity to receive the remainder of the trust when the time comes. Confirm that it is a tax-exempt organization recognized by the IRS.
Transfer Assets to the Trust
After you go through the legal stages of setting up your CRT, you need to actually fund it. While you can contribute cash, most people prefer to transfer highly-appreciated assets to the trust instead. You can contribute valuable assets like stocks, and even real estate.
If you need more ideas of what you can contribute, here are a few items you might consider:
- Antique or vintage cars
- Raw land
- Rare instruments
- Coins and stamps
- Fine art
The beauty of a charitable remainder trust is that it is extremely flexible, allowing you to fund it with just about anything. Not to mention, contributing these high-value assets may give you other benefits such as tax deductions. It will even help you avoid capital gains tax when you sell these assets within the CRT.
Name the Charity as Remainder Beneficiary
With your charitable remainder trust funded, you will finally be able to name the charity as your remainder beneficiary. Make sure the charity is recognized by the IRS as tax-exempt.
After the term of the trust, the charity you select will receive the remainder of your CRT funds when the payouts to your beneficiaries have been exhausted. They will receive a minimum of 10 percent of the CRT funds as calculated at the outset, though they could receive more. It will depend on how much is left in the CRT when the term ends and after all payouts to beneficiaries have been completed.
Prepare for Taxes
A charitable remainder trust is a specific type of irrevocable trust, meaning you will need to file an annual income tax return for this separate legal entity. You will file a federal tax return in any year where the trust earns more than $600. Filing your taxes does not have to be complicated once you get the hang of it, but most people prefer to leave it to the professionals.
To prepare for your taxes, you will need to secure a FEIN for the trust or a federal employer identification number. From here, you will file the U.S. Income Tax Return for Estates and Trusts (Form 1041). Trustees may also need to file Schedule K-1 if there has been any income distribution.
In addition to a tax return for the CRT, anyone who receives a payout from the trust will need to file it on their personal income tax returns.
Keep in mind that these taxes should be filed on or before April 15 each year. If you will be unable to complete them by this date, you can file Form 7004 for a five-month extension.
Get Expert Guidance When Setting Up Your Charitable Remainder Trust
Even if you know how to set up a charitable remainder trust, it can be complex. Not all financial planners are equipped to make the most of this investment vehicle. You need the guidance of charitable remainder trust experts to ensure your trust is set up correctly with your best interests (and the interests of your charity) in mind.
At Magellan, we have the experience needed to support your estate planning process. We can walk you through selecting the right type of charitable remainder trust, contributing your assets, and even help you to prepare for taxes at the end of the year. We will keep your best interests in mind as we guide you to plan for the future.
If you think a charitable remainder trust might be the perfect way for you to contribute to a charity and make use of your highly-appreciated assets, schedule a consultation with us at Magellan today!