When you create a charitable remainder trust, you initiate a plan to give the trust assets to a charitable organization at some time in the future. A charitable remainder trust (CRT) could be a great addition to your estate plan, depending on your goals.
What Is a Charitable Remainder Trust?
A charitable remainder trust, or CRT, is a special type of trust that owns assets managed by a trustee. The trust structure allows a beneficiary to receive trust income for a set term and a charitable organization to receive the remaining trust assets after the term ends.
The set term of the trust may last for up to 20 years, for a lifetime, or for a combination of a lifetime and up to 20 years. During this term, one or more beneficiaries who are not tax-exempt entities (not charities) will receive the income stream generated by trust assets. When the term ends, the charitable organization or organizations designated in the trust documents receives all of the trust assets and the trust stops operating.
There are several types of CRTs, distinguished by how the income stream to the beneficiaries is calculated and paid. Your CRT may be referred to as a CRAT (charitable remainder annuity trust) or CRUT (charitable remainder unitrust). Annuity and unitrust describe the different methods of calculating and paying trust income.
Are There Tax Benefits to Starting a CRT?
Charitable remainder trusts offer numerous tax benefits. Often, they are useful for capturing the value of appreciated assets without paying taxes when the assets are sold. The CRT is not taxed on the sale because it is a tax-exempt entity. For example, you can transfer an asset that has appreciated in value from when you purchased it to a CRT. The CRT can sell the asset without having to pay taxes on its appreciated value. If you had sold the asset without placing it in a CRT, you would have to pay taxes. Then the CRT can reinvest the sale profits.
Keep in mind that the non-tax-exempt CRT beneficiaries do pay taxes on the income that they receive from the trust. But when the tax-exempt beneficiaries receive the remainder of the trust assets, they do not pay taxes. These tax-exempt beneficiaries will be 501(c)(3) organizations such as charities or religious groups.
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