Question 1

What is a charitable remainder trust and when should I consider using one?

Accepted Answer

A charitable remainder trust is an irrevocable trust that pays you or other beneficiaries income for life or a specified term, then distributes remaining assets to charity or a family foundation. Consider one when you have charitable goals, appreciated assets, a need for income, deferring immediate taxation upon sale and receiving a partial charitable deduction.

Question 2

How does a charitable remainder trust work?

Accepted Answer

You transfer assets, often highly appreciated stock, real estate or a business interest, into an irrevocable trust. Because the trust is tax-exempt, it can sell those assets without paying capital gains tax at the time of sale and reinvest the full proceeds. It then pays you an income for life or a set term of up to 20 years. When the term ends, what remains goes to the charities you named.

Question 3

What are the tax benefits of a charitable remainder trust?

Accepted Answer

There are three. The trust can sell appreciated assets without paying capital gains tax at the time of sale, so the whole amount keeps working. You receive an income tax deduction in the year you fund it, based on the projected value of the charity's share. And the assets leave your taxable estate. Your income payments are still taxed as you receive them, under ordering rules set by the IRS.

Question 4

What is the difference between a CRAT and a CRUT?

Accepted Answer

A charitable remainder annuity trust (CRAT) pays a fixed dollar amount every year, set when the trust is created, and cannot accept more contributions later. A charitable remainder unitrust (CRUT) pays a fixed percentage of the trust's value, recalculated each year, so payments rise or fall with the investments, and you can add assets later. Both must pay out at least 5% a year.

Question 5

How do you set up a charitable remainder trust?

Accepted Answer

Setting one up usually takes a few weeks with an estate attorney and your advisor. The most important timing rule: the assets must go into the trust before any sale is agreed, or the IRS may treat the gain as yours. After that, the trustee sells, reinvests and files the trust's own tax return every year. Choose the assets, the trust type, the payout and term, and the charities first.

	Annuity trust (CRAT)	Unitrust (CRUT)
Payment	Fixed dollar amount	Fixed percentage of the trust's value
Payment changes?	No	Yes, recalculated every year
Add assets later?	No	Yes
Minimum payout	5% a year	5% a year

What is a charitable remainder trust and when should I consider using one?