What is a Charitable Remainder Trust?

A charitable remainder trust (CRT) is a type of irrevocable trust that creates an income stream to a named beneficiary (yourself or other named beneficiaries) for a specified term of up to 20 years or the life of one or more beneficiaries. At the end of that period, the remaining assets in the trust is dispersed to your chosen charity. The remaining property donated to charity must be at least 10% of the initial net fair market value of all the property placed in the trust. The charity can be either a public charity or a public foundation, but it must be IRS-approved.

A CRT can either last the lifetime of another beneficiary or for a specified term of up to 20 years. Assets you can donate to a CRT include cash, stocks, real estate, private company stocks, and private business interests.

Types of Charitable Remainder Trusts

There are two types of charitable remainder trusts: charitable remainder annuity trusts and charitable remainder unitrusts. They differ in how they pay beneficiaries.

• Charitable Remainder Annuity Trust. This type of CRT pays a specific dollar amount to the non-charitable beneficiary each year. The annuity must be at least 5% and no more than 50% of the value of the trust’s property when it was established.

• Charitable Remainder Unitrust. This type of CRT pays a percentage of the trust value to the non-charitable beneficiary each year. Generally, the payments must equal at least 5% and no more than 50% of the fair market value of the trust assets, valued annually. A charitable remainder unitrust allows for additional contributions.

Benefits of a Charitable Remainder Trust in Naples?

There are many benefits to including a CRT in your Naples estate plan.

• You can leave a charitable legacy. A CRT is a great way to leave a gift to a charity that is important to you. Because it is set up in advance, it allows the charity to plan for your contribution.

• A CRT reduces your tax liability. There are multiple tax benefits to creating a CRT, including:

1. When you make your initial contribution to the trust, you receive a partial income tax deduction. The amount of the partial income tax deduction is based on various factors, including the type of CRT, the term of the trust, the projected income payments, and IRS interest rates.

2. The property inside the trust grows tax-free. This can translate into more income for you and a larger gift to the charity.

3. There are no capital gains when the charity eventually sells the trust assets. They can preserve the full fair market value of the asset.

4. Because CRTs are irrevocable, it is not included in your taxable estate and can reduce federal estate tax liability. In 2022, the federal estate tax exemption is $12.06 for individuals.

It is important to note that the named beneficiary does have to pay income tax on the income stream they receive.

• A CRT provides asset protection. Because it is an irrevocable trust, the assets inside the trust are protected from creditors, lawsuits, and divorce.

• You can receive a lifetime income. A CRT allows you to have the best of both worlds. You can receive income annually, semiannually, quarterly, or monthly while still pursuing philanthropic goals.

Is a Charitable Remainder Trust Right for You?

Before you add a CRT to your Naples estate plan, you should be aware of the following:

• A CRT cannot be easily changed or dissolved. You effectively lose all control and ownership of the property once it is transferred into the trust. You cannot later decide to remove assets, change the beneficiary, or terminate the trust.

• A CRT typically requires valuable assets. If the trust property is too small, it will not provide income as well as maintain enough value to be of use to the charity.

• A CRT can be expensive to manage. A CRT requires active management. You and your attorney should complete a cost/benefit analysis before deciding whether it is the best tool for you.

How Do You Set Up a Charitable Remainder Trust in Naples, Florida?

Creating a CRT can be complicated and specific steps must be followed for the trust to achieve its goals. It is critical to work with an experienced Naples estate planning attorney familiar with trusts. They will ensure that the trust meets legal requirements and help you avoid any penalties for breach of tax laws.

Call A Naples Trust Lawyer

If you have questions about charitable remainder trusts or types of trusts you can include in your estate plan, you should contact Nici Law Firm. James R. Nici is an experienced Naples trust attorney with over 25 years of experience. Contact our office today at (239) 449-6150 or use our web form to set up a free consultation.