Will this be the year where you finally establish that financial legacy you contemplated for far too long? A lot goes into the process – You need to do something to protect your estate, gain tax benefits, and secure some income for your beneficiaries. All of this can be done with a charitable remainder trust (CRT), but is it the right fit for your finances?
In this complete guide, we will go over the pros and cons of a charitable remainder trust so that you can make an informed decision about where your money should go.
What is a Charitable Remainder Trust?
Before we dive into the logistics of contributing to a charitable remainder trust, let’s outline what one of these trusts can do.
Charitable remainder trusts are irrevocable trusts where donors can contribute cash, assets, or property. During a set term or for a lifetime, beneficiaries receive a guaranteed income stream from the trust. At its conclusion, charity will receive the remainder (a minimum of 10 percent).
Pros of a Charitable Remainder Trust
With a quick definition out of the way, you may already be nodding your head and thinking about the myriad ways you can benefit from a charitable remainder trust. Here are some of the most advantageous and strategic benefits of these trusts.
Tax Advantages
First and foremost, the main reason people give to charitable remainder trusts again and again is for charitable giving tax benefits. You can take a deduction of up to 60 percent of your AGI for cash donations and up to 30 percent of your AGI for assets. But that is just the tip of the iceberg when it comes to the tax benefits you will see in these trusts.
In addition to tax deductions on your annual return, you can also avoid capital gains taxes on any appreciated assets you contribute to the CRT. If you have stocks or real estate that have gone up in value since your initial investment, this allows you to maximize your gift and keep money out of the government’s pocket.
Not to mention, it removes those items from your estate so that your beneficiaries will not have a massive tax debt upon your passing.
Income for Beneficiaries
Maybe you worry about how your beneficiaries will financially care for themselves after you pass away. Charitable remainder trusts give beneficiaries a guaranteed payout for a set term (or for a lifetime). This is a great way to establish a legacy for your loved ones and set them up for financial security for decades to come.
While the income they receive from the trust may be taxable, the unearned bonus of the additional 30 to 40 percent of money usually offsets any potential taxes. And if managed properly, the tax characterization could be long term capital gain.
Eliminate Probate
After your passing, the last thing your family wants to do is go through the court system as they grieve. Probate is a lengthy process and the cost can seriously offset what you leave behind. This is also important to think about because it means that whatever is settled in probate will be public knowledge, so your beneficiaries will have limited privacy.
For this reason, trusts play a significant role in estate planning. If you contribute to a charitable remainder trust, it takes the money and assets from your estate and allows your family to avoid probate.
Protection for Your Assets
Worried you might come upon hard times or that a beneficiary might fall into substantial debt? A smart way to protect your assets is to place them inside this type of irrevocable trust. Once the ink has dried on the paperwork, those assets are inaccessible to creditors and lawsuits. It protects you in a way that few other vehicles can.
Making a Difference for Charity
Of course, the most obvious advantage to a charitable remainder trust is that you can make a real impact on a charity that you select. You may have to highlight a charity upon setting up the trust or you could name a donor-advised fund that gives you more flexibility to recommend grants later on.
Cons of a Charitable Remainder Trust
While there are some serious advantages to consider when setting up a trust, there are also a few drawbacks that should be considered.
Irrevocable Trust
While they come with many strategic tax benefits, irrevocable trusts also have a few notable downsides. Notably, the minute that you place your cash and assets inside of a charitable remainder trust, you cannot change your mind.
Make sure that you can withstand financial hardship without that money because CRTs are irrevocable, meaning that money cannot be taken out of them except for the fixed income stream established.
Annuity Trust Provides No Protection from Inflation
The income stream that you establish and the specific terms you set might seem generous right now, but will they hold up twenty years from now? The fixed income aspect of the annuity trust has one major downside: it will not protect your funds against inflation. That means your money may not stretch as far as you want it to in the years ahead. However, the unitrust option allows your income to adjust to the balance–be it higher or lower–every year.
The Remaining Funds Must Go to Charity
No matter how much (or little) money is left at the end of a term or the end of a lifetime, the remainder of the trust must be donated to the selected eligible charity or charities. There is no way to revise the trust or to shortchange the charity. A minimum of 10 percent of the initial value of the trust must be given to charity or you run the risk of losing some of your tax advantages.
Other Charitable Vehicles
If you are still unsure whether a charitable remainder trust is the right move for you, you should keep in mind that it is far from your only option. Both donor-advised funds (DAFs) and private foundations can help you leave a legacy without the strict guidelines of a charitable remainder trust.
A donor-advised fund allows you to take the tax deduction for your giving right away and places the funds in a separate account. You can then recommend grants for the charities that mean a lot to you when they need money for new initiatives and projects. This allows you to support multiple charities and to change your philanthropic giving over time.
The downside to a DAF is that it does not provide a steady stream of income to beneficiaries.
On the other hand, you may want to consider giving via a private foundation. This allows you to give to private charities which are not on the table with donor-advised funds. You can establish a private foundation to include yourself and your beneficiaries who will carry on your legacy years from now.
In other words, you create a charitable foundation for your own philanthropic goals. You will be extremely hands-on in the giving process and can show your loved ones how you want them to carry on giving in your absence.
Chart Your Charitable Giving Course with Confidence
If you think a charitable remainder trust might be the best vehicle for your financial legacy, we want to talk with you. Magellan offers comprehensive estate, tax, legal, and financial planning services so that you can maximize your giving and leave your mark on the world.
Contact us here to learn more about our one-stop shop services for charitable remainder trusts!
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.