A Charitable Remainder Trust, created in 1969 by the US Congress, is an irrevocable trust that provides for two defined beneficiaries. The income beneficiaries (the grantor and the grantor’s spouse) and the named charity or charities.
The grantors often serve as trustees to the trust which allows full investment control of the assets in the trust. Although a Charitable Remainder Trust is irrevocable, the charitable beneficiaries may be changed at any time. The income beneficiaries receive a set percentage of income for their lifetime from the trust. The charity or charities receive the principal of the trust after the income beneficiaries are deceased.
The amount of income paid out to the income beneficiary depends upon the payout percentage chosen as well as the amount of income generated by assets inside the Charitable Remainder Trust. The IRS states that a Charitable Remainder Trust must distribute at least 5% of the net fair market value of its total assets.
Charitable Remainder Trusts are attractive because one does not pay any capital gains taxes which can range from 10% to 20% of an asset's growth in value. It is not uncommon for Charitable Remainder Trusts to be funded with stocks and real estate (assets with high appreciation values). Establishing a trust of this nature as part of a retirement plan is appealing to many because unlike IRAs or 401(k) plans, there are no limits on how much one can contribute to a Charitable Remainder Trust.
A Charitable Remainder Trust additionally qualifies the grantor for an income tax deduction. The amount of the deduction is the present value of the remainder interest to the charity. An average deduction falls in the range of 20-50% against one’s adjusted gross income.
A Charitable Remainder Trust is considered "outside of your estate" by the IRS. As a result, it is said that one can save as much as 48 cents of every dollar placed in a Charitable Remainder Trust.
