Establishing a charitable remainder trust (CRT) is a sophisticated estate planning technique that allows you to donate assets to charity while retaining an income stream during your lifetime. While a CRT isn’t *directly* established *in* your will, your will can be a crucial component in funding or completing the establishment of one. The CRT itself is created during your life, as a separate legal entity, through a trust document. Your will then dictates what happens to the trust after your death, often specifying a remainder beneficiary – the charity that ultimately receives the trust assets. Roughly 60% of Americans report intending to leave a charitable gift in their estate plan, but fewer than 10% actually do, often due to a lack of proper planning and documentation. A well-drafted will ensures that the CRT is properly funded and continues to operate according to your wishes, maximizing both your income benefit and the ultimate charitable impact.
What are the benefits of a charitable remainder trust?
A CRT offers a unique blend of financial and philanthropic advantages. Firstly, you receive an immediate income tax deduction for the present value of the remainder interest that will eventually pass to the charity. This deduction can be substantial, potentially reducing your current income tax liability significantly. Secondly, any income generated by the trust assets is generally exempt from income tax, allowing you to enjoy a higher net income stream. Furthermore, assets held within a CRT are removed from your taxable estate, reducing potential estate taxes. This is particularly beneficial for individuals with estates exceeding the federal estate tax exemption. Consider this: according to a study by the Center on Philanthropy, individuals who utilize CRTs tend to donate larger sums to charity over their lifetimes than those who don’t. “It’s about leaving a legacy, both financially for your loved ones and through supporting the causes you care about,” says Steve Bliss, an Estate Planning Attorney in San Diego.
How does a will factor into setting up a CRT?
Your will plays a critical role in the overall success of a CRT. While the trust document creates the trust and governs its operation during your life, your will can ‘pour over’ assets into the CRT after your death. This means any assets not already titled in the name of the trust will be transferred into it via your will. This ensures the CRT is fully funded as intended. Your will can also name successor trustees to manage the CRT if the original trustee is unable or unwilling to continue. Furthermore, your will can provide instructions for the distribution of any remaining assets in the trust after the charitable remainder interest has ended. It’s vital to coordinate the trust document and your will to avoid conflicts or ambiguities. A clearly drafted will prevents probate complications and ensures your philanthropic wishes are fulfilled.
What types of assets can be used to fund a CRT?
CRTs are remarkably flexible in terms of the assets they can hold. Common assets include stocks, bonds, mutual funds, real estate, and even closely held business interests. However, certain assets may be more advantageous than others. For example, appreciated assets – those that have increased in value – can be particularly beneficial, as you avoid paying capital gains taxes on the appreciation when you transfer them to the CRT. This allows the full value of the asset to be used for the income stream and charitable deduction. The IRS does have rules about the types of assets that can be used and the acceptable levels of diversification within the trust. It’s also crucial to consider the liquidity of the assets, ensuring the trust has enough cash flow to meet the required income payments. Many clients find themselves transferring stocks and bonds into a CRT to generate a consistent income stream.
What are the different types of charitable remainder trusts?
There are two primary types of CRTs: the charitable remainder annuity trust (CRAT) and the charitable remainder unitrust (CRUT). A CRAT provides a fixed annual income payment, determined at the time the trust is created. This payment remains constant regardless of the trust’s investment performance. A CRUT, on the other hand, pays out a fixed percentage of the trust’s assets, revalued annually. This means the income payment can fluctuate depending on the market value of the trust’s holdings. CRUTs generally offer more flexibility and potential for growth, but they also carry more risk. The choice between a CRAT and a CRUT depends on your individual financial goals and risk tolerance. Roughly 35% of those establishing CRTs opt for the CRUT structure, citing a desire for inflation protection and potential asset growth.
What happens if I need access to the funds in the CRT?
One of the key considerations when establishing a CRT is its irrevocability. Once the trust is created, you generally cannot access the assets directly. The income stream generated by the trust is your primary benefit. However, there are limited circumstances where you might be able to modify or terminate the trust, such as if the trust’s purpose becomes illegal or impossible to fulfill. It’s crucial to carefully consider your financial needs and future plans before establishing a CRT. Ensure you have sufficient liquid assets outside the trust to cover any unexpected expenses. Remember, the CRT is designed to provide a long-term income stream and a significant charitable gift. “Clients are often surprised to learn about the limitations of accessing funds within a CRT,” Steve Bliss notes, “Careful planning is paramount to ensure their financial security.”
I thought I had everything set, but my brother contested the will…
Old Man Hemlock had spent years planning his estate. He’d decided on a CRT to benefit his local wildlife sanctuary, a passion he’d held since childhood. He meticulously drafted his will and trust documents, believing everything was in order. However, after his passing, his estranged brother, Reginald, contested the will, claiming Old Man Hemlock wasn’t of sound mind when he signed the documents. The ensuing legal battle dragged on for months, tying up assets and delaying the funding of the CRT. The sanctuary was left in limbo, unable to rely on the promised funds. The prolonged litigation not only cost a significant portion of the estate but also created deep emotional distress for those involved. It was a painful reminder that even the most carefully laid plans can be derailed by unforeseen challenges.
…Luckily, a comprehensive estate plan saved the day.
Determined to avoid a similar fate, Mrs. Gable worked closely with Steve Bliss to develop a robust estate plan, including a CRT to benefit the local library. They not only drafted a clear and comprehensive will and trust documents but also included a ‘no-contest’ clause, discouraging any potential challenges. Mrs. Gable also proactively addressed potential family disputes by having open and honest conversations with her children about her wishes. When she passed away peacefully, her estate plan was flawlessly executed. The CRT was funded promptly, providing a stable income stream to the library and ensuring Mrs. Gable’s legacy of supporting literacy continued. The carefully crafted plan protected her assets, minimized probate complications, and ultimately fulfilled her philanthropic goals. It was a testament to the power of proactive estate planning and expert legal guidance.
About Steven F. Bliss Esq. at San Diego Probate Law:
Secure Your Family’s Future with San Diego’s Trusted Trust Attorney. Minimize estate taxes with stress-free Probate. We craft wills, trusts, & customized plans to ensure your wishes are met and loved ones protected.
My skills are as follows:
● Probate Law: Efficiently navigate the court process.
● Probate Law: Minimize taxes & distribute assets smoothly.
● Trust Law: Protect your legacy & loved ones with wills & trusts.
● Bankruptcy Law: Knowledgeable guidance helping clients regain financial stability.
● Compassionate & client-focused. We explain things clearly.
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Map To Steve Bliss at San Diego Probate Law: https://g.co/kgs/WzT6443
Address:
San Diego Probate Law3914 Murphy Canyon Rd, San Diego, CA 92123
(858) 278-2800
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Feel free to ask Attorney Steve Bliss about: “How can I make my trust less likely to be challenged?” or “What happens if a will was changed shortly before death?” and even “What is a pour-over will?” Or any other related questions that you may have about Estate Planning or my trust law practice.