When it comes to the idea of setting aside some of your hard-earned funds for a favorite charity in your estate plan, you may experience some degree of uncertainty. For example, you may worry that any decently sized amount of money set aside for charity would inevitably be consumed by taxes and also function as some sort of disservice to your heirs over the long run.
While these concerns are understandable, they are also somewhat misplaced. Indeed, the estate planning mechanism of a charitable trust — specifically a charitable remainder trust — can help a person donate generously while providing their heirs with considerable tax benefits.
What is a charitable remainder trust?
A charitable remainder trust is created when a person looking to make a charitable donation (i.e., the trustor) sets up the trust and funds it, meaning they transfer all the property or money they wish to give to a certain charity directly into it.
Once this is completed, the chosen charity will then assume the role of trustee, meaning they are tasked with investing, managing and generally safeguarding the trust funds. In accordance with the trust terms, the trustee will also pay a portion of the income generated by these trust funds to either the trustor or another named individual.
Upon the death of the trustor, the charitable remainder trust terminates and its assets go directly to the charity.
How long do these payments to the trustor or a named individual last?
The payments to either the trustor or another named individual will last as long as the trustor specified when setting up the charitable remainder trust. Indeed, they could last for a set amount of years or for the life of the trustor.
Is there any limitation on the charity that can be chosen for the charitable remainder trust?
The charity selected for the charitable remainder trust must be approved by the Internal Revenue Service, meaning they are generally exempt from paying taxes.
Can a trustor change their mind and withdraw funds from the trust?
No. A charitable remainder trust is irrevocable, meaning the funds cannot be legally withdrawn once the trust comes into existence.
We’ll continue this discussion in our next post, examining the tax benefits provided by a charitable remainder trust.
If you have questions regarding the formation of a charitable trust — or any other type of trust — please consider sitting down with an experienced legal professional who can answer your questions and outline your options.