Header Image: Is a Charitable Remainder Trust right for me?

You’ve already made the decision: you want to donate a large portion of your estate to a nonprofit that is close to your heart. You want to help them achieve their mission as part of your legacy to future generations.

You’ve looked at the tax implications, your total assets and income, and are thinking to make the donation as a bequest in your will.

But did you know there are ways to make that donation now, and receive income from it for decades to come? If you plan to donate a tangible asset, such as stocks or real estate that isn’t needed as a primary residence, a Charitable Remainder Trust may be something to consider.

How a Charitable Remainder Trust can work for you

Creating the trust and funding it with your donation provides an instant tax deduction that can be sizable, depending on the value of assets in the trust.

Plus, long after the initial tax rewards have been taken advantage of, individuals named in the trust continue to receive tax-free income for a period of time specified in the trust – making it a steady source of retirement income during the remainder of the donor’s lifetime, a nice way to provide for heirs or a reliable income stream for the charity.

Be sure to include the right professionals

The initial income tax deduction for the donor is based on the type of trust and the individual’s own tax situation. The term of the trust, projected payments to the recipient(s) and interest rates are all subject to IRS requirements, too, so it’s important to make sure an estate planning attorney and your CPA or tax professional(s) are included in the process.

When the trust is created, assets in the trust are moved out of the donor’s estate, eliminating any need to pay taxes on them when the estate is settled after death. Because it changes the estate, revisiting the donor’s will and other legal documents may also be necessary.

If the income beneficiary is not the donor, there may also be gift and estate tax considerations to discuss with the intended recipient.

How a Charitable Remainder Trust works for the charity

When someone creates a Charitable Remainder Trust, the trustee sells assets in the trust tax-free at their market value, investing cash from that sale into an income-producing asset.

They use income generated by that new asset to pay those named in the trust on a monthly, quarterly, annual or other timeframe determined when the trust was created.

Once the specified timeframe has ended (often a maximum of twenty years) or the last individual named as a trust recipient has passed away, any assets remaining in the trust go to the charity (or charities) named in the trust.

Annuity vs. Unitrust

There are two types of Charitable Remainder Trusts – an annuity that pays a fixed rate to the charity each year, and a unitrust that pays a variable amount based on performance of the trust’s assets.

If interest rates are low, the annuity can be a good choice. If interest rates are high and the trust assets are well managed, payments to the recipient can grow quickly as the trust grows, or drop if the economy or trust investments have difficulties.

The benefits and requirements of each vary and should be discussed.

What can I use to fund the trust?

Common assets used to fund a Charitable Remainder Trust include cash, closely held stock, retirement plan assets, appreciated securities, real estate and tangible personal property, such as a fine art collection, antiques, coin collection, cars, boats and more.

Can’t I sell just the asset myself and re-invest that money, then donate it as a bequest in my will?

Capital gains taxes can be significant, as can estate taxes down the road.

Comparing the value of the asset, the balance of the asset to be invested once capital gains are subtracted, the potential interest that can be earned when investing what remains, possible income from that asset and the tax implications are complex questions with many variables.

It’s always a good idea to consult with estate planning and tax professionals to fully understand the implications of any decision before making it.

Here’s an example of how a Charitable Remainder Trust might work:

Susan is 75 and wants to make a gift to Sun Health Foundation, and is looking for ways to receive tax-free income in the future. She creates a Charitable Remainder Unitrust funded with assets valued at $500,000 that pay her annual lifetime payments equal to 6 percent of the fair market value of the trust assets (revalued annually).

She’s eligible for a federal income tax charitable deduction of $276,880* in the year she creates and funds the trust, which saves her $88,232 based on her 32 percent tax bracket. She also receives $30,000 the first year from the trust, with subsequent annual payments that will vary depending on the annual valuations of the trust assets.

*Based on annual payments, and a 3.2 percent charitable midterm federal rate. Deductions and calculations will vary depending on your personal circumstances. Visit our website to learn more!

If you’d like to seek advice about future gifting options to Sun Health Foundation that reflect your commitment to healthy living and superior health care in the West Valley, please contact us at (623) 832-5330 or info@SunHealthFoundation.org.

Your support ensures that the highest level of health care is available when you or your loved ones need it the most, and is greatly appreciated.

To make an immediate donation online, please visit https://sunhealthfoundation.org/donate-az-online/.

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