A charitable remainder trust can be an excellent estate planning tool for certain individuals who want to receive tax saving benefits and want to donate a large amount of wealth to a charity. The charitable remainder trust allows you to bequeath assets to a charity after you die, but while you’re alive, you’ll get to benefit from those assets while profiting from some important tax breaks.
How charitable remainder trusts operate
Imagine you have a large and valuable investment portfolio that you want to give to a charity after you’re gone. However, in the meantime, you want to benefit from the income generated from that investment portfolio. You can transfer ownership of the portfolio of the charitable remainder trust and arrange to receive income from the trust until you die or until a specific point in time, when whatever is left in the trust will go to your named charity.
Alternatively, you might bequeath the charitable remainder trust to a loved one — such as a spouse, son or daughter — and that trust will continue paying the person a set amount of income until the beneficiary dies, at which point a charity will receive the remainder.
3 tax advantages of a charitable remainder trust
First, one of the first tax benefits of a charitable remainder trust relates to the assets you permanently give over to the trust. You can claim them as an income tax deduction divided over five years; however, the deduction will only apply to the amount of funds that are estimated to be the “remainder” after you die.
Second, property in the trust will be exempt from estate taxes because it will not belong to your estate. Instead, it will be the property of the charitable remainder trust.
Third, if you want to liquidate a property with large capital gains taxes and use the proceeds, you can transfer it into a charitable remainder trust and liquidate it within the trust. This will prevent the need to pay capital gains taxes on the sale, but you’ll also be designating part of the property for charity after you die.
Is a charitable remainder trust right for you?
A charitable remainder trust won’t work for everyone, but for those it benefits, they can reap massive tax-saving rewards while helping the charity of their choice.