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What are the Pros and Cons of Charitable Remainder Trusts?

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Several types of trust exist to help people protect their assets, avoid costly estate taxes, or ensure their beneficiaries get the assets they are entitled to while avoiding the expensive and lengthy probate process. One of the ways someone can distribute their assets after they are gone is via a charitable remainder trust.

What is a Charitable Remainder Trust?

A charitable remainder trust is intended for a grantor who has built a sizable estate and is searching for a way to receive reliable payments.

This type of trust provides the grantor or their beneficiaries with income from assets inside the trust for the rest of their life or a period not exceeding 20 years. At the end of the term of the trust, the remaining balance within the trust is donated to the charity of the grantor’s choice established at the beginning of the trust’s terms.

There are two types of charitable remainder trusts (CRTs):

  • Charitable remainder annuity trusts (CRATs) pay a fixed annual annuity amount, disallowing new contributions. CRATs do not change their annuity amount.
  • Charitable remainder unitrusts (CRUTs), which pay a fixed percentage of the trust’s assets, are reviewed annually, and allow contributions. Each year, the income received from a CRUT will vary.

What Are the Advantages of a Charitable Remainder Trust?

  • You receive partial tax deductions for the donated assets through a CRT
  • There are no capital gains taxes paid when donated assets are sold
  • Contributed assets are no longer part of your estate, meaning they are not included when figuring estate taxes
  • You can receive income from reinvested CRT proceeds
  • Upon a CRT’s termination, you can decide which charities receive its assets

What Are the Disadvantages of a Charitable Remainder Trust?

  • For there to be income for yourself and value to the charity, you must make large contributions to the CRT
  • A CRT is typically irrevocable; therefore, you cannot change your mind once you have finalized your provisions and terms
  • The funds placed in a CRT are no longer in your control, and you do not have access to them
  • Income received from your CRT can reduce the total contribution left to your charity of choice
  • If you plan to obtain high amounts of income from your CRT, you risk leaving nothing to the charity once the terms are completed or you pass away

How Can I Decide If a Charitable Remainder Trust is Right for Me?

If used for the right reasons and set up correctly, a charitable remainder trust can be a significantly beneficial type of trust, not only to the person setting it up but to the charity receiving the donation at the end of the CRT’s term.

If you are looking to correctly set up a charitable remainder trust in terms that are beneficial to yourself and the charity of your choice, call Rainey & Rainey, Attorneys at Law, LP at (254) 457-5083 to set up your initial consultation.

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