What Is a Charitable Remainder Trust and How Does It Work?

A charitable remainder trust is a way to pledge money or other property to your favorite charity during your lifetime, while reserving some peace of mind for yourself. Some notable benefits of setting up a charitable remainder trust are that you get a tax break now and can continue receiving income from the trust property until your death. This means you can decide now where some of your property will go in the future, while preserving financial security for your unforeseen needs.

A charitable remainder trust also offers tax advantages

Another perk of a charitable remainder trust is that it can allow you to legally avoid paying capital gains taxes on property that has appreciated in value since you acquired it. This is done by establishing the charitable remainder trust and transferring the property directly to the trust prior to you realizing a capital gain. After the transfer, the trust can immediately liquidate the property and reinvest, if desired, without owing capital gains taxes.

For example, imagine you own stock which has a basis of $10,000 and it is now worth $110,000. If the long-term capital gains tax rate is 15 percent, you will most likely owe capital gains taxes of $15,000, because the property increased in value by $100,000 while you owned it.

The trust can diversify investments and pay income to you

Instead, you could establish a charitable remainder trust and transfer the stock to the trust. The trust can immediately liquidate and diversify its investments, while also paying you an annuity from the trust's annual income for the rest of your life. You only need to pay taxes on the income you receive from the trust as time goes by.

Careful planning is required

Of course, as with any plan to legally avoid taxes, a charitable remainder trust must be set up carefully according to Internal Revenue Service rules to qualify for the tax break. To qualify for tax-exempt status, trusts must provide annuity payments for a period of up to 20 years or for the life of the donor, benefit a recognized non-profit charitable organization and leave at least 10 percent of the initial fair market value of the trust assets to the charity.

For more information and to find out if a charitable remainder trust is right for you, call one of our experienced estate planning lawyers at Peterson Law Group.  Our Conroe, Texas attorneys help clients develop comprehensive estate plans, including wills and trusts. Call us at 936-337-4681 or 979-703-7014 or visit us online to arrange an appointment.