Why charitable remainder trusts are attractive

In the prospect of the increasing number of baby boomers reaching retirement in 2010, more and more retirees enroll as volunteers for non-profits and charities aiming to contribute to their local communities. In this context, charitable remainder trusts are becoming increasingly attractive in the retirees’ effort to contribute to charity and save on taxes as well.

Charitable remainder trusts (CRTs) aim at reducing the taxable income of beneficiaries. In most cases, CRTs have two beneficiaries. One beneficiary is the person that donates the funds and the other beneficiary is the qualified charity or tax-exempt organization supported by the funds. In their most fundamental form, charitable remainder trusts allow the donation of assets and property into a solitary group. This is done by donating assets into the trust for a specified period of time, which, in return, disperses a percentage of income from the charitable trust to the beneficiary. After the beneficiary passes away, the remainder of the trust is transferred to the designated charity reckoned as beneficiary.

One of the most important benefits of charitable remainder trusts is that they allow the beneficiary to become the trustee and make investment decisions and/or other decisions regarding the assets. Although CRTs are irrevocable, they allow a degree of personal freedom by permitting the change of beneficiaries.

With a CRT, beneficiaries can choose the amount of income they wish to draw from the charity trust per year depending on their payout percentage and the amount of income generated by their assets. According to the IRS, the minimum net distribution of CRT should be at least 5 percent of the net fair market value of the trust’s assets on an annual basis. Some beneficiaries may distribute more than 5 percent per year, but the higher the distribution, the lower the income tax deduction. Particularly, given the unfavorable market conditions that may reduce the trust’s principal, maximum net distribution should not exceed 10 percent on an annual basis.

Another benefit is that, because the assets of CRTs are benefiting a charity, CRTs are not subject to any capital gain taxes that can range from 10 percent to 20 percent of an asset’s growth in value. This is why CRTs are widely viewed as ideal for highly appreciated with limited income potential such as stocks and real estate. To illustrate this better, we suppose that the sell price of a real estate property is $800,000, whereas the original cost of the property was $100,000. Capital gain taxes would be calculated on the $700,000 difference, which with a 15 percent rate would easily top $105,000, depending on how long the property was owned and the owner’s overall tax situation. By avoiding the capital gains tax, the full value of the assets transfers to charity trust. However, the income from trust assets is subject to federal income taxes.

Charitable remainder trusts are also use to increase retirement plans. Many beneficiaries contribute to the CRTs in the form of non-dividend paying growth stocks, variable annuities or zero-coupon bonds. As the CRT grows and the income stays in during the early years, payouts are higher in retirement. Besides, unlike IRAs and 401k plans, there are no limits on how much one can contribute to a charitable remainder trust.

Conclusively, charitable remainder funds are a great strategy to achieve both personal and financial goals. Under the right circumstances, a CRT can increase the income of the beneficiary, reduce taxes and provide significant financial support.

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