Receiving payments well into the future for you or your beneficiaries might be part of your estate planning. Donating money to charity is also a noble pursuit, and it comes with certain inherent tax benefits. When handling charitable donations and annuity payments, you will likely come across both charitable remainder trusts and charitable gift annuities.
For those who want to make the most financial impact, which is the better choice?
Both have benefits for you and your beneficiaries, as well as the charity of your choosing. This detailed breakdown of a charitable remainder trust vs. a charitable gift annuity will help you decide which one is the right fit for you.
Charitable Remainder Trust vs. Charitable Gift Annuity
Charitable remainder trusts (CRTs) and charitable gift annuities (CGAs) offer benefits to you as the donor that are unique to the type of arrangement selected.
In general, the difference between the two arrangements lies in their setup. A CRT requires a legal entity and agreement to be drawn up, while a CGA requires no trust agreement, trustee, or even a tax return. It is a much simpler process to set up and maintain a CGA.
Another significant difference that separates charitable remainder trusts and charitable gift annuities is how beneficiary payments are handled. Under a CGA, the annuity is guaranteed by the charity you have selected, whereas a CRT depends on the overall value of the trust (and can thus change from year to year in some cases).
Like a CRT, you can use many different types of assets to fund your CGA, from real estate to a more traditional cash donation. The asset would need to be sold to make it liquid, as some states may have rules regarding the CGA holdings and may require the assets to be in bonds rather than tied up in physical assets or riskier stocks.
What to Know About Charitable Remainder Trusts
Charitable remainder trusts are more complicated to set up, but they have a greater degree of security for beneficiaries who would receive payments. There are several types of CRTs, but most will pay either a set percentage of the value of the trust (minimum 5%) or a set amount to the beneficiaries each year.
The remaining 10% of the account is given to charity when the terms of the trust end.
Payments can be received for up to 20 years or for the lifetime of a designated beneficiary, or both. It can be funded with cash donations as well as illiquid assets like real estate, antiques, and even cars. Keep in mind that once donated to the trust, you cannot get these assets back, and they may be sold in order to facilitate the payments to beneficiaries.
- No cap on income beneficiaries (as long as the charitable deduction is 10% of the contribution)
- Can divide donations among multiple charities or change charities at a later date
- Payments can last for a lifetime or a term, or both
- Allows you to select a trustee to oversee investments
- Ability to avoid capital gains taxation on the sale of an appreciated asset
- More expensive and complex to set up
- Loss of control over property, which removes it from the taxable estate
What to Know About Charitable Gift Annuities
While charitable remainder trusts are often funded with much larger amounts, a charitable gift annuity can be established with a lower investment of $5,000 and increase from there. Your donation to charity will reside in an account with the charity where it will be invested. Donors receive regular payments from this amount until the point of death, when the charity claims the remaining funds.
If you want to donate now and receive the benefits later, you can arrange to do this as well. This permits younger people to make donations to the charity of their choice right now and receive the payouts in retirement when funds might be harder to come by.
A benefit of the CGA is that you may be able to take a tax deduction when you make the account based on what will be given to charity at the conclusion of the account.
- Offers fixed payments without fluctuations from stocks or interest rates
- Beneficial with contributions as low as $5,000
- Less expensive to set up compared to CRTs
- Cash contributions could mean more tax-free income compared to CRTs
- Payments depend on the solubility of the charity
- Less versatile than CRTs
Which Is Better for You?
When looking at charitable remainder trusts vs. charitable gift annuities, figuring out which type of arrangement is better for you is tricky as they both have pros and cons.
For some, the answer might be charitable remainder trusts, especially if they plan to make larger donations and want a set term for the payout. A CRT is typically opened when someone nears retirement as part of detailed estate planning. Payments can be limited to a specific term instead of terminating at the end of life.
On the other hand, CGAs are more flexible if you are younger when you implement a CGA. You might choose to defer payments until you come to retirement age. This makes it ideal for receiving income in your golden years, even if you want to make the donation and take the tax break in the here and now.
While a charitable remainder trust enables you to rest easy that your funds are under your control, a charitable gift annuity requires that you have faith in the charity you donate to. If the charity becomes insoluble and cannot make the payments to you, then there is no recourse to take.
Plan Your Estate with Confidence
Managing your estate is a complex matter that depends on your individual circumstances. If you want to plan your estate with confidence, then schedule a consultation with the professionals at Magellan Planning. Reach out to us today to learn more about whether a CRT or a CGA can be the right fit for your finances.
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.