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How charitable remainder trusts work

On Behalf of | Nov 24, 2021 | Estate Planning |

A trust is an estate planning tool that gives the grantor, or creator, control of assets. Trusts are either revocable, meaning they can be changed, or irrevocable, meaning they cannot be changed. A common type of irrevocable trust in Concord, California, is the charitable remainder, which has several benefits.

Overview of charitable remainder trusts

Charitable remainder trusts are irrevocable trusts that give cash or property to the grantor for a time period. Many grantors choose charitable remainder trusts for estate planning because they don’t have to pay capital gains on earnings. At the end of the term, the named charity gets the remaining assets or cash, and the grantor can take a tax deduction.

The grantor can take a charitable tax deduction of up to 60% of their gross income for trusts funded with cash. The income may go to an individual, a married couple, or children, but terms are commonly limited to 20 years. The IRS rules for charitable remainder trusts require the income stream to be a minimum of 5% and a maximum of 50% of assets.

Types of charitable remainder trusts

A charitable remainder annuity allows the grantor to contribute a fixed income to a beneficiary, but they can’t add more. The grantor can choose the percentage based on fair market value of assets, which must meet the minimums. However, there may be exceptions to the minimums for surviving chronically ill or disabled spouses based on new rulings.

The charitable remainder unitrust, or CRUT, works similar to the CRAT, giving a fixed contribution to a beneficiary for the life of the grantor. A net income unitrust pays based on when the trust earns money, and a flip unitrust is sometimes used for noncash assets.

Trusts are estate planning tools that don’t require a certain income level. However, since laws change, a grantor should discuss options with a financial advisor.