DEFINITION of 'Charitable Remainder Trust'

A charitable remainder trust is a tax-exempt irrevocable trust designed to reduce the taxable income of individuals by first dispersing income to the beneficiaries of the trust for a specified period of time and then donating the remainder of the trust to the designated charity. This is a “split interest” giving vehicle that allows a trustor to make contributions, be eligible for a partial tax deduction, and donate remaining assets.

BREAKING DOWN 'Charitable Remainder Trust'

A central idea of a charitable remainder trust is to reduce taxes. This is done by first donating assets into the trust and then having it pay the beneficiary for a stated period of time. Once this time-frame expires, the remainder of the estate is transferred to the charities deemed as beneficiaries.

Charitable remainder trusts are irrevocable. This means that they cannot be modified or terminated without the beneficiary's permission. The grantor or trustor, having transferred assets into the trust, effectively removes all of her rights of ownership to the assets and the trust upon creation of its irrevocable status. In contrast, a revocable trust, allows the grantor modifications.

This charitable giving strategy also enables people to pursue philanthropic goals while still generating income. In addition to tax management charitable remainder trusts can offer benefits for retirement and estate planning.

Two main types of charitable remainder trusts include:

  1. Charitable remainder annuity trusts or CRATs that distribute a fixed annuity each year
  2. Charitable remainder unitrusts or CRUTs that distribute a fixed annual percentage based on the balance of the trust assets (CRATs do not allow for additional contributions, while CRUTs do permit this.)

Charitable Remainder Trust and Additional Types of Trusts

Additional types of trusts outside of charitable remainder trusts include.a bare trust, in which the beneficiary has the absolute right to the capital and assets within the trust, as well as the income generated from these assets. While a trustee often oversees the investments within the trust, the beneficiary has the final say over how the trust's capital or income is distributed. In bare trusts, beneficiaries are taxed on the income that trust assets generate (i.e. interest, dividends and rent).

In contrast, an alimony substitution trust is an agreement in which a divorced person agrees to pay spousal support via a trust’s generated income. With regards to taxation, the ex-spouse responsible for providing payments is not required to pay income taxes on trust’s income nor do they receive a tax deduction.

RELATED TERMS
  1. Irrevocable Income-Only Trust (IIOT)

    An irrevocable income-only trust is a type of living trust often ...
  2. Naked Trust

    A naked trust is a basic, simple type of trust into which a trustor ...
  3. Beneficiary Of Trust

    A beneficiary of trust is the individual or group of people who ...
  4. Bare Trust

    A bare trust is a type of trust that provides beneficiaries with ...
  5. Active Trust

    An active trust is a trust in which the trustee is required to ...
  6. Special Needs Trust

    Special needs trust is a legal arrangement that allows a third ...
Related Articles
  1. Managing Wealth

    When to Trust a Revocable Trust

    Unsure how your assets will be dispersed once you're gone? Here's a revocable trust can help.
  2. Managing Wealth

    Pick the Perfect Trust

    Trusts are an estate plan's anchor, but the terminology can be confusing. We cut through the clutter.
  3. Financial Advisor

    Understanding How Top Trust Companies Operate

    Trust companies perform a wide range of services related to investment and asset management. Learn why to use a trust company and what they can do for you.
  4. Retirement

    How To Set Up A Trust Fund In The U.K.

    A guide to the whys and wherefores of setting up this most versatile of estate-planning instruments in the United Kingdom.
  5. Retirement

    How To Set Up a Trust Fund If You're Not Rich

    You don't need to be wealthy to create your own trust fund. Here's why and how to go about it.
  6. Investing

    Unit Investment Trusts Market: 3 Trends in 2016

    Learn more about unit investment trusts (UITs), and discover some of the most common trends in the UIT market to date in the year 2016.
  7. Retirement

    How to Minimize Estate Taxes via Charitable Giving

    Here are several ways to reduce your taxable estate while providing a gift to a worthwhile cause.
  8. Financial Advisor

    How Trust Funds Can Safeguard Your Children

    Certain types of trust funds can help to protect your assets from bankruptcies and civil actions, and can be established to safeguard your children and designated beneficiaries.
  9. Managing Wealth

    Encouraging Good Habits With An Incentive Trust

    Money can be a powerful motivator - why not use it to teach your heirs positive lessons?
  10. Retirement

    5 Benefits of Creating a Trust to Manage Wealth

    Trusts should be considered as part of an estate plan to manage and protect wealth.
Trading Center