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 and 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.

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