Establishing a Charitable Remainder Trust Leaves a Legacy

Please note these are general charitable tax strategies. Talk with your financial advisor or tax planner for advice specific to you.

If you’ve reached the stage in your life where you want your hard work to leave a lasting, positive impact on your community, selecting the best planned giving option for your portfolio is the first step. One idea to consider as part of your planned giving strategy is a charitable remainder trust.

What Is a Charitable Remainder Trust?

A charitable remainder trust is defined as a “split-interest” giving opportunity, which allows you the ability to generate income from assets you give to the trust you establish. 

Income is generated each year of your life or for a specific number of years (not to exceed 20 years). The term “split-interest” comes from the fact that the trust is split between the initial non-charitable beneficiary and the charitable entity you select, which receives the remainder of the trust at the end of the trust term. 

This type of trust has the potential to provide tax benefits and income. Charitable remainder trusts can receive payments in two different ways, annuity trusts or unitrusts. This is decided based on how the payments are calculated.

The Tax Benefits

Tax savings for tax-savvy donors are one of the most desired reasons to establish a charitable remainder trust. Along with a partial tax deduction, you may also experience a reduction in capital gains, gift, and estate taxes. 

The best time to establish a charitable remainder trust varies. Because of its flexibility, you can create one when it is best suited for your personal planning goals. When that time comes, immediate income tax charitable deductions can be made into the trust. The deduction is based on the value of assets that will eventually go to the charity of your choice.

Charitable Remainder Trusts and Donor Advised Funds

In a number of ways, a charitable remainder trust and a donor-advised fund are alike. Both planned giving options can offer long-term support to nonprofit organizations and immediate tax benefits to you.

There are some important differences, however. A charitable remainder trust is established as an income-producer for the donor that, at the end of its chosen term, will contribute the remaining assets to the selected nonprofit. 

A donor-advised fund, alternatively, can generate recurring income for the nonprofit, as the appreciated capital is distributed as a grant at the request of the fundholder. This option also provides tax benefits. While the income tax deduction of a charitable remainder trust is equal to the present value of the remaining interest, the tax deduction for a donor-advised fund is equal to the value of the gift. 

Finally, if you’re looking for a current or future income stream, as a donor, a charitable remainder trust combined with a donor-advised fund could be an excellent option. The combination brings with it many benefits, ultimately improving the charitable remainder trust and creating flexibility for you, the donor.

An Example of a Charitable Remainder Trust In Action

If you’re a regular donor or volunteer with Twin Cities Habitat for Humanity, and you’ve built up a substantial estate over the years, you might be wondering how you can leave your legacy. You want your support of Habitat’s mission of providing access to affordable housing, to live on. Until that time comes, you’d also still like to generate a little extra income to sustain yourself. A charitable remainder trust might be right for you. 

For example, should you choose a charitable remainder unitrust with annual lifetime payments to you equaling 5% of the fair market value, funding the trust with assets valued at $750,000, what are the results? You’d receive $37,500 the first year from the trust. After that, payment amounts will vary year after year, depending upon the value of the trust assets calculated each year. You would be eligible for a federal income tax deduction of $451,050 (based on the current IRS discount rate of 2.2%). 

What better way to make a positive impact than to support Twin Cities Habitat for Humanity through the establishment of a charitable remainder trust – leaving behind a legacy of support for affordable homeownership in your community.