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Charitable Remainder Trusts: A Comprehensive Guide to Tax Benefits

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Charitable Remainder Trusts: A Comprehensive Guide to Tax Benefits

Are you a philanthropist? Do you love supporting charitable causes while keeping your financial future secure? If that is what you’re interested in, then charitable remainder trust is your most suitable investment option. This estate planning tool allows you to support what you’re passionate and thoughtful about, i.e. charity, while also allowing you to reap substantial tax benefits. 

For your understanding, we have curated an in depth blog post that will help you navigate tax challenges while investing in CRTs. 

What is the Charitable Remainder Trust?

A CRT or charitable remainder trust, has been purposefully designed to benefit both the parties i.e. charity and the grantor. This trust can be understood as an irrevocable trust that allows the grantor to transfer assets in the form of cash, stocks or even real estate to the designated trust. The trust, in turn, manages those transferred assets, for a certain period (term) or until your demise (as per the agreement). 

According to the agreement, throughout the trust term, either you or the beneficiary is entitled to receive a fixed pay from the trust income annually. This pay can either be a fixed dollar amount – referred to as an annuity trust or a fixed percentage – referred to as unitrust. Upon the termination of the term, the remainder of the transferred assets are distributed to the designated charitable beneficiary. 

What Are the Different Types of Charitable Remainder Trust?

Primarily, there are two types of CRTs: Each type of CRT has its own set of tax advantages that you must be fully aware of:

  • Charitable Remainder Unitrust (CRUT): In CRUT, a fixed annual payout percentage of the FMV of the trusts assets, which is somewhere between 5% and 50%, is decided. Thus ensuring that you are entitled to a constant income stream. 
  • Charitable Remainder Annuity Trust (CRAT): A certain dollar amount has been fixed in the CRAT that is then distributed as income annually. Throughout the term, this type of income remains constant, irrespective of trust value fluctuations. Conclusively, a predictable income is therefore obtained, while allowing the charity to receive the remaining trust assets even after the termination of the term. 

What are the tax benefits of Charitable Remainder Trusts?

Unlike any other estate planning tool, CRTs offer a host of tax benefits, which are listed below:

  • Income Tax Deduction: Once you sign a legal agreement to transfer your assets to any of the CRTs, you are eligible to receive a charitable income tax deduction for the current value of the remainder interest that is currently going to the charity foundation. Depending upon the CRT type or the payout rate, the exact deduction will then be determined. 
  • Tax-Deferred Growth: The assets that are a part of CRT timely grow tax deferred. Unless the assets are sold, capital gains taxes are not triggered on any appreciation. 
  • Potential Income Tax-Free Distributions: As per the agreement, whichever type of assets are transferred to the CRT, a part of the income distribution that you receive annually may be exempted from tax deductions. 

Professional Assistance:

Due to the complexities of a CRT, it is necessary to seek professional assistance before a CRT establishment. A professional expert from a reputable agency like Dimovtax.com will assist you with the following: 

  • Estate Planning Attorney: A professional is able to guide through the legal process of CRT creation depending on your customary needs. 
  • Tax Advisor: As per the changing and perplexing tax regulations, a tax advisor is the one who can help you maximize your tax returns. 
  • Financial Expert: A financial expert has sound financial knowledge and therefore can advise you on the intricacies of choosing the right asset or investment strategies that are beneficial for you and the charity.

Bottom Line:

CRTs have been identified as an impactful tool for anyone who earnestly wishes to leave a legacy to a charitable cause while potentially receiving massive tax benefits. You must understand CRT types and what tax benefits come with each of these types in order to make sound and prospective decisions. 

Unlike any other investment tool, CRT is one of the ideal investment tools for those who are willing to make a realistic philanthropic move. Therefore, considering an expert like Dimovtax is of paramount significance to ensure a successful CRT implementation that brings a host of benefits for you and the invested charitable organization. 

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