Significant and stable retirement income, reduction in taxes, whether income, capital gains, or estate respectively, and the provision of critical needed support for worthy charitable organizations and endeavors. If any, or all, of these sound good to you and your estate planning goals, charitable remainder trusts might be a useful option. Charitable remainder trusts, not to be confused with charitable lead trusts, is a way many people are planning for retirement but also “paying it forward.”
- What is a Charitable Remainder Trust?
A charitable remainder trust is a type of irrevocable trust. Irrevocable trusts are trusts in which the grantor, you, relinquishes all control and ownership over the trust and the assets used to fund the trust. Thus, the trust cannot be changed or canceled without the beneficiaries’ permission. Prior to trust formation, the grantor can dictate whatever terms desired to govern the trust, but after formation, those terms control independent of grantor’s wishes and desires.
What makes an ordinary irrevocable trust in to a charitable remainder trust are a few unique characteristics. Namely, the guiding purpose of the trust and the remainder interest. First, usually, the primary goals with a charitable remainder trust is to reduce taxes and provide additional retirement income. The namesake charitable remainder, however, denotes that eventually, after the grantor passes, whatever is left over in the trust, the remainder, is given to a chosen charity.
- How do Charitable Remainder Trusts help pay for retirement?
The name of game is tax reduction and maximizing potential income production, but how do charitable remainder trusts accomplish this. In a nutshell, it begins with transferring high valued assets into an irrevocable trust, thus initially avoiding estate taxes when making the trust.
After funding, assets are then sold by the trustee, thus avoiding capital gains on the sale, and these proceeds are reinvested into income producing assets, which can add to available retirement income. Additionally, after you pass, the whatever is left in trust, the remainder, passes on to the charitable beneficiary. The precise manner how a grantor will receive income is usually either a fixed distribution rate via percentage value of appreciated assets or a flat amount of actual income earned by trust assets.
It should be noted, that charitable remainder trusts should not be viewed as the primary vehicle in which an individual will pay for retirement, these trusts really supplement income more than anything. This reality is largely due to the nature of these trusts. A large trust funding takes full advantage of the associated tax breaks, has the ability to earn significant and usable income for retirement expenses based off the initial principle funding, and, at the end of life, represent a charitable contribution large enough to actually make a different in the world. Thus, if an estate is healthy enough in which a charitable remainder trust is an attractive option, usually the grantor(s) have a lesser concern with the financials of old age.
- How are Charitable Remainder Trusts taxed?
At initial funding of a charitable remainder trust, estate tax is avoided on the assets placed in trust and an immediate charitable income tax deduction is enjoyed. The charitable income tax deduction often bumps the grantor down to a lower tax bracket for the year. Additionally, capital gains are avoided when the trustee liquidates trust assets for reinvestment.
Regarding annual personal income tax for monies distributed from the trust, this is usually paid per your individual income tax rate, however, often at this point in people’s lives, when they are no longer personally working, and most money and assets have already been transferred into various estate planning tools, people are often in the lowest tax bracket. Further, though distributions from a charitable remainder trust are taxable income, often, if proper estate planning was implemented, the total amount for a taxable estate is so low for a person that distributions for a charitable remainder trust are, for all intents and purposes, tax free.
- Do I give up control over what I put in my Charitable Remainder Trust?
No, the trustee you select to manage the trust will govern the trust and its assets according to the rules and terms you dictate at creation. You are always in control. Further, grantors may retain the right to change the trustee if they are doing a poor job or change the charity to another qualified charity without losing any past or future tax advantages.
- If I help out my favorite charity with a Charitable Remainder Trusts, won’t my children be mad?
The happiness of your friends and family all comes down to proper planning. For those people with sizable estates, it is no problem to leave significant money to both children and favorite charities, there’s more than enough for everyone. There is a common concern, however, that people with modest estates don’t have the option to charitably bequest anything, I mean, there’s only so much to go around right?
Not exactly. Yes, it is correct that money and assets are finite, but, with the income tax savings inherent in using a charitable remainder trust, a person always has the option to either fund an irrevocable life insurance trust or buy a life insurance policy outright. Either way, the life insurance purchased with the tax savings can replace the full value of any assets left to charity and make sure any surviving children receive their full inheritance as well. Using life insurance, via trust or ordinary policy, also avoids probate concerns and income taxes. Estate tax and asset protection concerns, however, on any policy proceeds will only be addressed through the use of a life insurance trust. Ensuring children aren’t left out in the cold when it comes to inheritance is a major concern for most people, make sure your Ohio estate planning attorney is giving a comprehensive rundown of all of your estate planning options, life insurance options included.
If you think a charitable remainder trust could help you and your family, speak with your Ohio estate planning attorney. You can convert appreciated assets into lifetime income. You can receive an immediate charitable income tax deduction. You can remove assets from your estate, thus reducing estate taxes. And since no capital gains apply when the assets are sold, you receive more to reinvest in income generating property. All of which is in addition to make a substantial gift to your favorite charity.