You know the old adage about having your cake and eating it, too. And the other one about not being able to take it with you. With a charitable remainder trust, you can have some of your cake to enjoy in retirement, and you can have the rest to dispense as you see fit.
With these vehicles, you can set yourself up for retirement income and at the same time create a future donation to a cause you really believe in.
“You can balance two wants at the same time,” said Christine G. Russell, a senior manager of retirement and annuities with TD Ameritrade. “It can help you hedge your worry that you won’t have enough income, but also might allow you to help support your favorite charity or charities.”
These trusts can also offer tax advantages, which means you might be able to keep more of your cake.
“Since 1969, countless families have used charitable remainder trusts (CRTs) to increase their incomes, save taxes, and benefit charities,” according to EstatePlanning.com, a service of The WealthCounsel Companies, a nationwide collaborative of estate planning attorneys and wealth-planning professionals.
The Ingredients and Baking Instructions
The concept of a CRT is rather simple: You fund the trust with assets, and then the trust pays you over time. When you die, what’s left goes to charity.
“The best assets are those that have greatly appreciated in value since you purchased them, specifically publicly traded securities, real estate, and stock in some closely held corporations,” according to EstatePlanning.com. You can also fund the trust with cash.
Once you transfer an asset into a charitable remainder trust, it’s removed from your estate, which means estate taxes aren’t due on that asset when you die, according to EstatePlanning.com. You may also qualify for a charitable income tax deduction.
According to legal information and lawyer database website FindLaw.com, charitable remainder trusts also allow you to convert non-income-producing property into cash without paying taxes on the profits. For example, if you donate appreciated stock to the trust, the trust then may be able to sell the stock without paying capital gains tax.
Selling assets yourself and reinvesting the proceeds would likely cost you more in taxes and provide less income, EstatePlanning.com says.
There are different types of charitable remainder trusts.
- A charitable remainder unitrust is designed to pay you a fixed percentage of the assets in the trust, meaning your annual income will fluctuate along with the value of the trust, according to EstatePlanning.com.
- If you’d rather receive a fixed distribution in retirement, you can go for a charitable remainder annuity trust, is designed to pay a fixed amount regardless of the trust’s performance, the website said.
“This option is usually a good choice at older ages,” according to EstatePlanning.com. “It doesn’t provide protection against inflation like the unitrust does, but some people like the security of being able to count on a definite amount of income each year.”
Of course, income distribution is mandatory in this type of investment vehicle and the trust may have to dip into principal to help satisfy the payout. Also, no additions to the principal may be made after the trust is established.
Consult a Pro Before You Bake
A charitable remainder trust is a type of irrevocable trust, so make sure this is the avenue you want to take. “Once you start the trust and it comes into operation, you cannot take back what you have given,” according to FindLaw.com.
If you decide you want to set up a charitable remainder trust, make sure to talk to a professional, Russell says.
Your financial advisor may be able to talk about the main issues with charitable remainder trusts on a basic level and then point you to an attorney who can draw one up for you, she says.
The Icing on the Cake
Russell says that once you set up a charitable remainder trust, you can get retirement income while you’re still living and be confident that you can leave the remainder to charity.
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