Individuals may wish to put some of their hard-earned assets toward charitable causes or organizations throughout and at the end of their lives. While charitable gifts and lump sum donations may seem generous, they can sometimes incur unexpected tax benefits that require caution. One way to charitably donate in a tax-savvy way is through establishing a charitable remainder trust. This can be especially wise for appreciable assets or sums large enough to exceed gift tax limitations.
What is a Charitable Remainder Trust?
Charitable remainder trusts allow people to donate to charitable causes while also generating income for themselves or another beneficiary in the meantime. First, the person who wishes to donate will place the assets—which can include cash and equity, real estate, and even business interests— into the charitable remainder trust. The assets will be paid to a beneficiary other than the charity, such as you or other named individuals like family members, for a certain period of time. This period of time is up to 20 years or the lifetime of the noncharitable beneficiaries. After that time frame, the remaining assets are transferred to one or multiple charitable causes or organizations. This transfer avoids the headache of probate.
There are two types of charitable remainder trusts: annuity trusts and unitrusts. An annuity trust will pay you or your other noncharitable beneficiary the same dollar amount of your choosing each year, regardless of assets or investments coming into the trust. A unitrust will pay a variable amount that is a percentage of the fair market value of the trust and will be recalculated each year.
The trust is irrevocable, meaning it will not be part of the estate and thus not subject to probate or estate taxes. In addition, you receive a tax deduction for establishing the trust. Furthermore, investments inside the trust can grow without being subject to capital gains taxes. And, compared to other donation methods, you can avoid gift taxes.
The income stream you or your noncharitable beneficiary will receive from the trust will be steady and predictable, and the remainder will be protected from probate or creditor headaches. However, the irrevocable status means you also have no control over the assets in the trust. Charitable remainder trusts are also complex and can be expensive to create. A skilled estate planning attorney can help you determine if a charitable remainder trust makes sense for you and your family. Other charitable giving options, such as outright gifts or charitable lead trusts, may also make sense for your unique situation.
Speak with a Texas Estate Planning Attorney Today
Should you explore establishing a charitable remainder trust? If you would like to engage in philanthropic giving but are concerned about the tax implications, contact a Houston estate planning attorney to conduct a cost-benefit analysis and discuss next steps. The team at McCulloch Miller, PLLC has over 30 years of estate planning experience. Contact our office at 713-936-9073 to schedule a free initial consultation with an attorney on our team.