The Charitable Remainder Trust has been around for quite a while as well. It comes in many different forms that have acronyms like CRT, CRUT, CRAT, NIMCRUT, CGA. There are a couple of capital gains tax strategies that also involve non-charitable irrevocable trusts.
The differences are too complex to go into detail in this article, but the gist is that you pledge all or part of an asset to a charity either immediately or at your death for benefits like a tax deduction, tax forgiveness and an income stream while living. For the non-charitable trusts, you basically give up control of your asset for a series of installment payments and pay taxes as you receive principle.
The IRS allows you favorable tax treatment if you pledge to a charity and exchange control of your asset for a series of interest payments. Here are some considerations when contemplating an irrevocable trust.
Who will own the trust? The Charity or (if a non-charitable trust) Related and/or Unrelated parties? What happens if something happens to one of the owners? Who does ownership pass to then? Will the new owner have your best interests at heart?
What happens if the trust defaults on making payments?
One might be perfectly comfortable with a chosen representative, but what if they pass away or are no longer able to handle their responsibility?
What are the costs involved in setting up and maintaining a trust? Once you find out what it costs to establish one, administer one, file annual tax returns and audit one on an ongoing basis you may be taken aback at how fees diminish anticipated returns.
Who is the trustee? This is supposed to be a knowledgeable person and fiduciary who invests the funds prudently with the main goal of meeting the payment obligation for the length of the agreement.
You might be lured into believing the assets will generate high returns on an ongoing basis and are not limited to principle protecting vehicles. What you may not realize is:
If the trust does make more money than it is obligated to pay out to you each year it must file its own tax return and pay income tax. Trust income tax rates are higher than personal income tax rates and can quickly reduce a gain.
Most of the money you will receive in annual payments will be taxed at ordinary income rates. Depending on the amount and your tax bracket, this might also take a huge chunk of your payment stream.
If the funds are not in a guaranteed environment, this means the funds can also lose money. If your payments are fixed, the trust can run out of money prior to your full payout. If you are getting variable income, it can decrease in future years, just when you may need more to offset inflation. Do you have other sources of income if this should happen?
The more actively managed the funds are, the higher the trading costs and management fees. This also requires more careful auditing and oversight.
A charitable trust will leave the remainder to the charity at your death. If you have heirs to consider, you may have to use insurance to replace the amount passed to charity. Are you insurable? Can you afford the insurance premiums?
Again, the considerations above are not comprehensive but should give much food for thought. There are ways to protect your funds and still give you a good return. For many, slow and steady should outweigh shooting for the brass ring at a stage in life where protection is more important than accumulation and the associated risk.
Paula Straub
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760-917-0858
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