Trusts of various types have been around for centuries and are flexible planning tools that can be used to accomplish a number of personal and financial goals. Many choose to rely on trusts to provide for management of assets by someone they trust. Others make use of trusts to delay or otherwise manage the transfers of property to loved ones or others due to their age or other circumstances.
Trusts can also allow a person to arrange for property to first be put to one use, then to another. For example, charitable remainder trust (sometimes referred to as a “CRT”) offers a way to make a future gift to American Diabetes Association after first providing income for yourself and/or others you name.&
Here's how a charitable remainder trust works:
- A trust is drafted by an appropriate advisor in consultation with those who will manage the trust.
- Assets are transferred to the trust to be managed by you or another person or entity you choose to be the trustee.
- Payments are made from the trust to you and/or others you name for life or other period of time you determine.
- You may benefit from a federal (and perhaps state) income tax charitable deduction and you may enjoy capital gains tax savings in the year you create the trust. Amounts used to fund your trust may not be part of your probate or taxable estate.
- When the trust ends, its remaining assets become a gift to American Diabetes Association. The gift portion is known as charitable remainder.
There are two primary types of charitable remainder trusts. The charitable remainder annuity trust, which provides you with a level and predictable income, and the charitable remainder unitrust, which provides you with a variable income. Each is described below.
A Gift with Predictable Income
A charitable remainder annuity trust is a way to make a gift while ensuring a fixed, regular income. Income from such a trust can be a reliable income supplement in retirement years. The payments received each year will be 5% or more of the amount originally placed in the trust. You determine the exact amount when your trust is created.
A Gift with Variable Income
Like the annuity trust, the charitable remainder unitrust provides for a gift to American Diabetes Association that allows a donor to first retain income for life or other period of time. But unlike the annuity trust, the income from a unitrust fluctuates over time with the value of the assets placed in the trust.
You determine the annual payment percentage when the gift is made. Each year this percentage (5% or more) of the value of the trust assets is paid to you or others you name. When the value of the investments increases, more income is received. The income will be less if the value of the trust assets declines. If provided for in the trust agreement, additions can be made to a unitrust and an additional tax deduction is allowed for part of any additional amounts contributed.
For those who would like to provide for an income that can grow over time, the charitable remainder unitrust can be an attractive option. Another benefit of charitable remainder trusts is the fact that no tax is payable by the trust at the time investment gains are realized, making it possible to enjoy increased income over time based on tax-free growth within the trust. This can be especially attractive to those who anticipate increases in growth in investments over time.
Income for a Period of Time You Choose
It is also possible to establish a charitable remainder trust for a fixed time period of up to 20 years. Such a trust may be useful if you would like to retain income to meet your needs over a limited time frame. It is also possible to create such a trust to provide income for one or more loved ones for a particular term of years.
