Charitable Remainder Trusts: The Basics

Video

Hi, it’s Andy Stautz with Stautz Law. We’re back talking about basic estate planning techniques. Today, not so basic. We’re talking about charitable remainder trusts.  

A charitable remainder trust is, as its name suggests, a trust with a charitable purpose. And the remainder part refers to when the charity gets the trust proceeds.  

So the scheme is the charitable remainder trust is set up once, and the settlor (or grantor) puts a lump sum into the trust. And receives a charitable deduction for part of the value of that lump sum in the year that the trust is made.  

There’s an upfront contribution to the trust, it’s a one time thing, and then there’s a partial charitable deduction on income taxes. And the formula for that is complicated. But you know, it’s maybe 1/3 of the value of the trust corpus.  

[O]nce the trust is funded, it then pays out an income stream over the next however many years. And that can be a term of years, you know, 20 years or it can be the lifetime of a beneficiary.  

The way the income stream is determined changes the flavor of the trust. So you can say the trust is going to pay out $10,000 a year and that way it works like an annuity. And that’s a charitable remainder annuity trust—a CRAT. Or you can say well, the trust is going to pay 5% of its value every year. That makes it a unitrust—a CRUT. In either case, though, you’ve got a beneficiary receiving some income stream from the trust corpus for some period of time. That’s called the lead interest.  

And then, OK, wait, what about charity? Well, charity gets the remainder interest. The charity gets whatever’s leftover after that income stream (term of years, life of a beneficiary) expires.  

So that can be a good planning tool for a charitably minded donor. You know you can create this as an inter vivos trust, during life; you can create it as a testamentary trust.  

But oftentimes the settlor will put assets into the trust to provide for someone else. Maybe an adult child with a creditor problems or other problems . . . To kind of give them that income stream and then whatever leftover to charity. And depending on the performance of the trust that can be a win win.  

So that’s the basics. And as you can see, it’s a pretty complicated structure. You’re going to want help setting it up there are some IRS rules that I haven’t had time to discuss here about, you know, the amount of payout, the length of the term, you know, make sure it’s set up right so it’s going to qualify for all those tax benefits and going to work like you want.  

Happy to discuss it with you and personalize it to your situation. I think it’s a fascinating planning tool. So book your initial meeting or give me a call. And I look forward to working with you soon. Thanks and bye!