Estate planning is about more than determining what happens to your property after your death. It is also an opportunity to give charitable contributions and enjoy some tax breaks. Setting up a charitable remainder trust allows you to make generous donations while also benefiting yourself and your heirs.
Using a CRT can potentially save you millions. Here is an overview of how these trusts work and what tax advantages you may gain.
How a CRT works
You set up a CRT by transferring assets you wish to donate into it. The charity you choose must have IRS approval. The charitable organization serves as the trustee and is responsible for protecting, managing and investing the funds. Then, the charity pays you or someone you designate a portion of the funds the trust accumulates. The trust ends when you die and the charity keeps the donated property.
Income tax deduction
Once you donate to your charitable trust, you can deduct an amount from your income tax over the span of five years. However, this is not a dollar-for-dollar deduction. Instead, the IRS determines your total deduction by subtracting the expected returns from your donation amount. For example, if you give $300,000 but expect to earn $100,000 in interest, your total deduction will be $200,000.
No capital gains tax on profits
You can turn appreciated property into profit without being on the hook for capital gains tax. For example, if you fund a CRT with stock, the charity sells the stock and invests the cash in a mutual fund, you can receive a monetary benefit without worrying about the tax liability.
Avoid the estate tax
Because the trust assets eventually go to the charity instead of your estate, they do not factor into the value of your estate. If you have a sizable estate, this may help you avoid the federal estate tax.