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What is the Charitable Remainder Trust 10% Rule?

What is the Charitable Remainder Trust 10% Rule?

November 30, 2022
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Taxes are an unavoidable part of your financial health, but what if you could shelter your income with tax benefits in Charitable Remainder Trusts (CRTs)? These accounts can be an excellent choice for charitable giving with an abundance of tax benefits. However, many people who could make good use of CRTs do not understand the Charitable Remainder Trust 10 percent rule and what it means for their giving.

If you have been thinking about CRTs, here is what you need to know about them and the 10 percent rule.

Charitable Remainder Trusts Explained 

A Charitable Remainder Trust does not have to be overly complex to understand. In short, it is a tax-exempt, irrevocable trust that passes onto individual beneficiaries for a set period of time or throughout their lives. Most of the time, a CRT is funded by donated assets that have appreciated over time.

After the irrevocable trust period ends, what remains in the account is donated to a specific charity or a Donor Advised Fund.

The concept of CRTs has been around since 1969 and is recognized by the IRS as a tax-advantaged account. It shelters holders from capital gains taxes, increases cash flow, protects the value of assets, and contributes meaningful donations to individual charities instead of paying taxes to fill out the government’s pockets.

The important thing is to stick to the Charitable Remainder Trust 10 percent rule, which we will cover in more detail in a moment.

Types of Charitable Remainder Trusts

There are a couple of CRTs that you can fund, namely Charitable Remainder Annuity Trusts (CRAT) or Charitable Remainder Unitrust (CRUT). Understanding the high-level differences between the two types of accounts is crucial to making the wisest financial decision for you, your future, and your beneficiaries. 

Charitable Remainder Annuity Trusts

An annuity trust is the first type of CRT that you may encounter. Under this type of account, you will receive a specific payout (in a dollar amount) each year. While the balance of the CRAT may change from year to year, the payout is always the same. One important thing to note here is that once the trust has been opened and funded, you cannot add additional assets to it.

Charitable Remainder Unitrust

Unlike CRATs, a Charitable Remainder Unitrust has a payout that varies depending on the value of the account. It pays a fixed percentage that is based on the value at the end of the year, which means that you may not receive a fixed amount year over year. Unlike CRATs, you can continue to fund a CRUT over the years with tax-deductible donations. 

What is the Charitable Remainder Trust 10 Percent Rule?

There is only one real catch to using a tax-sheltered CRT to manage the appreciated assets in your estate. Namely, that refers to the Charitable Remainder Trust 10 Percent Rule. At the end of the day, this rule makes it so that you must donate at least 10 percent of the fund to the charity of your choice at the end of the trust term (whether that means years or decades down the road).

Let’s take a look at a real-life example of how the 10 percent rule plays out.

Suppose that you opened a CRUT and contributed assets that were valued at around $600,000. To pass the CRT 10 percent rule, you must make that contribution of 10 percent ($60,000). This is where things will stand until you make your next contribution. If you have a CRAT and cannot make another contribution, this is where things will stay.

In other words, the remainder value of the trust must be equal to 10 percent of the amount that was funded.

This is absolutely essential if you want to take advantage of the tax benefits that a CRT can offer. If you do not adhere to the 10 percent rule, there are some pretty serious consequences. 

What Happens If You Flunk the Charitable Remainder Trust 10 Percent Rule?

The benefit of donating your assets to a CRT is that it offers many tax advantages. However, there are consequences if you do not end up passing this 10 percent rule. If it fails to pass the rule, then the government concludes that it does not qualify as a charitable trust and all of the tax benefits you might have received are forfeited.

In other words, you will end up paying an exorbitant amount of money to the government instead of bestowing it on the beneficiary of the CRT.

If you are thinking about opening a CRT, it is important to make sure that you consult with a team of professionals to meet the requirements. Missing out on this 10 percent rule can spell financial ruin for you as the donor to the trust.

Protect Your Wealth With Magellan

Handling a Charitable Remainder Trust means staying abreast of the latest rules and guidelines to make your charitable contributions tax-sheltered and advantaged. You do not want to leave the formation of your CRTs up to just anyone. Instead, trust the professionals at Magellan who specialize in CRTs and can help you set up an account that will fund your beneficiaries for years to come.

Magellan offers you a team of fiduciaries, meaning that they recommend the path that makes the most sense for you financially instead of the one that benefits the company. We can handle the legal aspect of setting up the irrevocable trust as well as help you navigate the tax process.* Our planning group can even help you to manage the CRT for a nominal fee.*

If you think that you could benefit from a CRT for appreciated assets, give Magellan a call today to set up your initial planning meeting and discuss your next steps!   

*Tax services offered by Magellan Tax, LLC. Legal services offered by Magellan Legal, LLC. Tax and legal services offered separately from Cetera Advisor Networks LLC which does not provide tax or legal advice.

Generally, a donor advised fund is a separately identified fund or account that is maintained and operated by a section 501(c)(3) organization, which is called a sponsoring organization. Each account is composed of contributions made by individual donors. Once the donor makes the contribution, the organization has legal control over it. However, the donor, or the donor's representative, retains advisory privileges with respect to the distribution of funds and the investment of assets in the account. Donors take a tax deduction for all contributions at the time they are made, even though the money may not be dispersed to a charity until much later.