Charitable remainder trusts (CRTs) are an excellent tool to reduce taxes in both retirement and estate planning.
Charitable remainder trusts are tax-exempt irrevocable trusts that are set up to accord with federal tax laws and regulations. Depending on the type of charitable remainder trust one chooses to establish, one can receive income for life or for a certain number of years. CRTs allow one to make a gift of assets while achieving tax savings and maintaining an income stream.
Charitable remainder trusts are of two types. The trusts are similar, but one major difference is the way in which income is generated from each. Another difference is the way the trusts are funded. Both types of trust can be funded with whatever assets one chooses. One doesn’t have to place all their assets into the trust, but it is important to keep in mind that transferring assets to either type of trusts is an irrevocable action, so the assets will not pass to one’s heirs.
The first is type of charitable remainder trust is charitable remainder unitrusts (CRUTs). In these trusts, the income stream will fluctuate over time. In terms of funding, new assets can be added to a CRUT at any time, including future bequest from a will. The second type of charitable remainder trust is a charitable remainder annuity trust (CRAT). Income stream will remain the same over time in these trusts. As far as funding a CRAT, additional assets may not be added after the initial funding, unlike the CRUTs.
In our next post, we’ll keep looking at charitable remainder trusts and what role they can play in estate planning.
Source: The Prairie Star, “Charitable trusts reduce taxes in retirement, estate plan,” Thomas Tilleman, 4 May 2011.