A charitable remainder trust is an excellent way to give back to charity and provide for some of your loved ones well into the future. The problem is that sometimes, tragedy strikes, and one of your beneficiaries may pass away sooner than expected. If you have a sizable trust fund left, what will happen to the assets it contains?
Preparation for the worst can help you ensure that your trust agreement is ready for any possible outcome. If you have a charitable remainder trust, death of an income beneficiary does not have to be a disaster.
Here is what you need to know to set up your irrevocable CRT the right way from the start.
What Happens to the CRT When the Income Beneficiary Dies?
Leaving a financial legacy for your loved ones is important to most people who set up a charitable remainder trust. If your beneficiary passes away, you want to know what will become of the funds set aside for them. Death throws everything out of balance, so be prepared for the wrench it throws in your plans by structuring your trust agreement the right way from the start.
If your income beneficiary is the last beneficiary to receive payments from the CRT, the trust is then terminated. The remaining amount of the trust will go to the charity you selected. In this case, they may receive more than the 10 percent rule minimum. This can be good news for the charity and still allow you to leave a large financial legacy with your giving.
However, there are other options if the death of the person in question was not the only beneficiary. It depends on the trust agreement you draw up at the start of your CRT. The distribution may be taken by the deceased income beneficiary’s children or spouse under some circumstances.
Consider an arrangement like this one where the income beneficiary changes upon the death of the beneficiary. Suppose that you set up your trust to provide a steady income to three children, intended to last for their lifetimes. One of your children passed away unexpectedly due to illness.
You could draft the trust agreement so that upon their death, part of their expected payment will go to their children (your grandchildren) instead. Alternatively, you could simply shift the payment amount to give larger percentages to the two remaining children. If you want their portion to be donated to charity, that is an option as well.
Will the Remaining Income Beneficiaries Receive Larger Distributions?
If the income beneficiary who passes away is not the only one to receive payments, then you may find that your other beneficiaries could receive a greater distribution. However, this is not always the case. It depends completely on the terms and provisions established in the trust agreement at the start of the CRT.
This is why it is crucial to work with professionals who can help you prepare for every possible outcome with your charitable remainder trust. Magellan Planning Group can help you think through the potential issues that could pop up with unthinkable tragedies that sometimes occur such as a life cut too short.
When you want the remainder of your CRT to go to beneficiaries and stick with the minimum 10 percent rule of charitable giving, then you will want to specify these terms in the initial agreement for the trust. This is why it is essential to work with a professional who can help you anticipate some of these worst-case scenarios.
Can You Change the Income Beneficiary?
Perhaps after the beneficiary has passed away, you want to change the income beneficiaries on your trust to have someone else take their place. Can you change the non-charitable beneficiaries on your charitable remainder trust, especially if a death occurs?
This could pose a problem for you because charitable remainder trusts are irrevocable. Although irrevocable trusts come with many tax advantages, one of the downsides of an irrevocable trust is that they cannot be altered once the ink dries on the trust agreement. You will not be able to remove or swap out a deceased beneficiary for someone else, so be very clear on how you draft the trust agreement with your trust attorney.
The best thing you can do to ensure that your trust creates a financial legacy for your family is to add contingencies for an untimely death. Some individuals may be happy to donate a larger portion of their trust to charity, but it’s also understandable that you’d like to support your loved ones by naming them as beneficiaries instead. Charitable trusts often allow for multiple beneficiaries.
This is the time to think about what your desired backup plan may be in the event of a death. Talk with your legal professionals to ensure that you get the exact outcome you want if a current beneficiary passes away.
Future-Proof Your Legacy with Magellan
Are you ready to explore the intricacies of establishing a charitable remainder trust to create a long-lasting legacy for your family, close friends, and the charity (or charities) of your choosing? Magellan offers a one-stop shop for all of your CRT needs: legal, financial, taxes, and estate planning which covers all of the basics and then some.
Allow us to walk you through the process of drafting an airtight trust agreement so that your hard-earned money goes where you want well into the future. An experienced trust attorney like those found under our umbrella can help you future-proof your trust. Contact us today to learn more about how our services can help you!
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.
Such trusts are used to develop a vehicle for donations to a favorite charity, which also allows for the reduction of income taxes through a charitable deduction and favorable tax treatment at the date of the gift by non-recognition of built-in capital gains. The use of trusts involves a complex web of tax rules and regulations. You should consider the counsel of an experienced estate planning professional before implementing such strategies.