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Clarksburg, WV 26301

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By Anna Melissa Price of Jenkins Fenstermaker, PLLC on 11/11/2020
Exploring the Benefits of a Charitable Remainder Trust

People often support charities that are important to them by making general monetary donations to those causes throughout their lives. In many cases, there are financial and legal vehicles that could be used when giving to charity that create a greater benefit for both the donor and recipient. This blog, the third in a series of seven on the topic of planned giving in estate plans, will broadly discuss some of the different types of charitable trusts and the specific benefits of a charitable remainder trust.

The Uses and Benefits of a Charitable Remainder Trust

Charitable remainder trusts (CRTs) are irrevocable, split-interest trusts that create a source of income for the designated beneficiary for a specified period, often until the death of the income beneficiary. It is common for the income beneficiary to be the grantor, but it can be whoever the grantor chooses. After the designated term expires, the remaining assets in the trust pass to a previously designated charity or charities.

People who use CRTs for planned giving often have highly-appreciated assets and/or a significant amount of wealth. They also have a wish to donate a portion of their wealth to one or more charitable causes. Doing so through a charitable remainder trust accomplishes that goal while providing additional advantages to the donor.

What Are the Benefits of a Charitable Remainder Trust?

The benefits of a charitable remainder trust include the following:

  • Income for the donor or beneficiary of choice, often through the conversion of appreciated assets;
  • A charitable tax deduction on current income taxes (with the option to carry over a portion of the deduction for five years) based on the anticipated allocation to charitable causes;
  • Non-profit treatment in the taxation of charitable remainder trust distributions allocated to charitable organizations or entities;
  • Ability to defer income to a later date but receive immediate income tax benefits;
  • Elimination of capital gains taxes when assets held within the trust are sold;
  • Reduction of estate taxes;
  • Protection of assets in the trust from creditors;
  • Benefits to the charity or charities supported; and
  • Legacy building and the gratification of supporting a cause you hold dear.

Wealth planning is a complex area that requires in-depth knowledge of various legal and financial considerations. For those in West Virginia (WV), Kentucky (KY), and Ohio (OH), a WV estate planning attorney at Jenkins Fenstermaker, PLLC can help you determine which tools and techniques are best suited to meet your needs and goals.

Types of Charitable Trusts: Choosing the Right Vehicle

There are two primary types of charitable trusts, with subcategories for each. Charitable lead trusts (CLTs) were the topic of the second blog in this series on charitable wealth planning. Here, we will discuss the types of charitable trusts that fall within the charitable remainder trust category:

CRATs and CRUTs both follow the process outlined above: assets are placed in the trust, payments are made to the designated income beneficiary for the term defined, and the remainder is paid to the charity or charities selected when the term expires.

The income provided to the beneficiary of a CRAT is predetermined and fixed—the amount received does not fluctuate over time with the overall value of the trust. In a CRUT, the income distribution is set at a percentage of the total assets in the trust and the actual amount is calculated annually. The income payments fluctuate, increasing when assets in the trust grow and decreasing when the trust’s assets lose value.

The second important difference between charitable remainder annuities and unitrusts is the grantor’s ability to make supplementary contributions to the trust. A CRAT does not allow additional contributions after the initial placement of assets in the trust, while a CRUT allows the grantor to place additional assets in the trust after it is established and even upon his or her death.

Taxation of Charitable Remainder Trust Distributions and Assets

When you choose a CRT for planned giving and wealth planning, there are various tax matters to consider. The initial assets placed in the trust are taxed in two parts: the income portion and the remainder. If the income beneficiary is someone other than the grantor, that portion of the contribution may be taxed as a gift. However, if the grantor is the income beneficiary, no gift tax is assessed. Regarding the taxation of charitable remainder trust distributions to the income beneficiary, these payments are taxable as income in the year the payments are received.

The portion of the trust’s assets that are allocated to a qualified charity or charities are treated as a charitable gift and the donor can claim the corresponding tax deduction. As tax-exempt entities, the charities that receive the remainder from a charitable trust do not have to pay taxes on those distributions.

Consult a WV Estate Planning Attorney about a CRT for Planned Giving

Because there are several different types of charitable trusts—and other trusts—available, each with a different structure for the taxation of distributions and assets, it is important to consult with a knowledgeable wealth planning professional to ensure the vehicle you choose is right for your situation before you commit to an irrevocable trust or any other estate planning tool.

Anna M. Price is a WV estate planning attorney at Huntington, WV law firm Jenkins Fenstermaker, PLLC. Anna serves clients in WV, KY, and OH and would be happy to meet with you to discuss the benefits of a charitable remainder trust and other wealth planning tools that can help preserve your wealth and ensure your legacy. Contact her today by calling (304) 523-2100 or completing the firm’s online contact form.