If you have done a little research into trusts, you probably already know something about how a typical living trust can provide you with income while you are alive, and then transfer its assets to your loved ones and your favorite charities after you are gone. This is a great option for many estate plans. However, that structure is not the only way you can achieve all those objectives.
With a specialized type of living trust known as a charitable remainder trust, you can start reaching your goals while you are still alive. This type of trust can even help you enjoy tax breaks.
Refresher on trusts
Before we explain the concept further, we should briefly go over the basics of living trusts.
When you place assets in a trust, you put a trustee in charge of those assets, and you name beneficiaries. The trustee invests or otherwise manages the assets and distributes the income according to the terms of the trust. Typically, you might name yourself as the beneficiary of the trust. You may even be able to name yourself as the trustee. Typically, you would also name a successor trustee and name your loved ones and favorite charities as the successor beneficiaries who will receive the income after you pass away.
Charitable remainder trusts
When you properly set up a charitable remainder trust, the trustee distributes income to charity (or charities) at the same time as the other beneficiaries. For instance, you could plan for the trust to provide income in the form of annuities, meaning that the trust would distribute a fixed amount to each beneficiary every year. Alternatively, you could set it up to pay a percentage of the total value of the trust on a regular basis.
Because you — as the trust creator — are donating to charity at the same time the trust is generating income for the other beneficiaries, you may be able to take a partial tax deduction. The exact deduction depends on many factors, including how much money is actually going to the charities.