How to Use a Charitable Remainder Trust as Part of Your Legacy Plans

What is a Charitable Remainder Trust?

A charitable remainder trust allows a donor to transfer an asset to an irrevocable trust, receive income for life, and direct the remainder to chosen charities.

Additionally, your donor advised fund can receive the assets remaining in the trust, ensuring your legacy planning includes significant charitable contributions.

How Does a Charitable Remainder Trust Work?

You can update the terms of the fund while creating the charitable remainder trust to align with your intentions for distributing to your favorite charities. This approach helps you achieve your goal of leaving a meaningful legacy to all your chosen causes.

Establishing the Trust:

You create the  trust and transfer assets into it. These assets can include cash, stocks, real estate, or other valuable property. Once transferred, these assets are no longer part of your personal estate.

Income Stream for Life:

You or other designated beneficiaries receive income from the trust for a specified period, which can be for your lifetime or up to 20 years. The income payments must be at least 5% of the trust’s assets, valued annually. This income supports you during your lifetime, helping you achieve your financial goals.

Tax Benefits:

Moreover, when you transfer assets into the trust, you may qualify for a charitable income tax deduction. The deduction is based on the fair market value of the assets transferred to the trust minus the present value of the expected income stream. The trust avoids capital gains tax when selling appreciated assets, allowing full reinvestment of the asset value.

Remainder to Charity:

After the specified period or upon your death, the remaining assets in the trust go to the designated charities. These charities can include your donor-advised fund, which allows you to specify how the funds should be distributed among various charitable organizations.

Updating the Terms:

You can update your donor-advised fund’s terms when you create the charitable remainder trust. This ensures that your legacy planning aligns with your current charitable intentions and adapts to any changes in your philanthropic priorities.

Estate Planning Benefits:

Finally, because the charitable remainder trust is an irrevocable trust, the assets are removed for estate tax purposes. This can significantly reduce your taxable estate, potentially lowering estate taxes and preserving more wealth for your beneficiaries and charitable causes.

Here’s Why This Works So Well

A charitable remainder trust qualifies as a charitable entity under the Internal Revenue Code. Here’s an example to help you understand the tax benefits:

Tom, a donor, bought property for $200,000, now worth $2 million.

When Tom transfers the property to the trust at a fair market value of $2 million with a cost basis of $200,000, and then the trust sells the property, the trust does not pay tax on the $1.8 million capital gain. Tom would have paid this tax if he had sold the property himself.

  • This allows the full $2 million in the trust to be invested for growth, subject to Tom’s lifetime income payments
  • Tom qualifies for a potentially significant charitable income tax deduction of the fair market value of the property given to the trust, minus the present value of the retained income stream
  • Lifetime payments to Tom (in an annual amount equal to at least 5% of trust assets) generally are subject to income tax during each year of the distributions, but the overall income tax hit to Tom likely will be less than if he had transacted an outright sale
  • Because the charitable remainder trust is an irrevocable trust, the property and the sale proceeds (other than what winds up in Tom’s estate from any unspent income stream payments) are excluded from Tom’s estate for estate tax purposes

Contrast this with an alternative scenario in which Tom sells the property, realizes a $1.8 million capital gain, pays tax on that gain, and makes gifts to charities from what was left, holding back enough to live on. In that situation, the proceeds would be included in Tom’s estate tax purposes.

The Community Foundation can help you with your legacy wishes, and a donor advised fund at the Community Foundation can be an excellent landing spot for complex gifts.

Contact us:

Marcia Shackelford, Chief Philanthropy Officer
609.219.1800 Ext. 809 or email Marcia

Michael Nuno, Vice President, Philanthropic Services
609.219.1800 Ext. 808 or email Michael

For more information or support, please contact:

Marcia Shackelford
Chief Philanthropy Officer
Email Marcia Shackelford

Michael Nuno
Vice President, Philanthropic Services
Email Michael Nuno