What Is A Charitable Remainder Trust And How Does It Work In Massachusetts?

Do you want to support a cause you care about while still holding onto an income stream for yourself or a loved one? A charitable remainder trust might be exactly the tool for that. Unlike a charitable lead trust, where the charity receives payments first, a charitable remainder trust flips the order, paying you or your beneficiaries first and leaving the remainder to charity. Here is how it actually works.

What a Charitable Remainder Trust Actually Does

A charitable remainder trust is an irrevocable trust authorized under federal law at Internal Revenue Code Section 664. The person creating the trust transfers assets into it, and the trustee then pays a stream of income to one or more non-charitable beneficiaries, often the donor themselves, for a set term of years or for the beneficiary’s lifetime. Once that term ends, whatever remains in the trust passes to one or more qualified charitable organizations. In other words, the family or individual beneficiary receives income first, and the charity gets what is left over.

The Two Structures: Annuity Trusts and Unitrusts

Charitable remainder trusts generally come in one of two forms, and the difference matters quite a bit depending on your goals. A charitable remainder annuity trust pays a fixed dollar amount each year, determined when the trust is created and never adjusted afterward. Under federal law, that amount must be at least 5 percent, and no more than 50 percent, of the trust’s initial value. A charitable remainder unitrust works differently. Instead of a fixed dollar figure, it pays a fixed percentage of the trust’s value, recalculated annually. That means the payment can rise if the trust’s investments perform well, or fall if they decline. Neither structure is inherently better. The right choice depends on whether you want predictability or the potential for growing income over time.

Why These Trusts Appeal to Massachusetts Donors

A few features make charitable remainder trusts particularly useful for people holding appreciated assets, such as stock or real estate that has grown significantly in value. Some of the practical advantages include:

• The trust itself is generally exempt from income tax, which means highly appreciated assets can be sold inside the trust without triggering an immediate capital gains tax
• The donor may qualify for a partial charitable income tax deduction in the year the trust is funded, based on the present value of the eventual gift to charity
• The trust can convert a single low yielding asset into a diversified portfolio that generates ongoing income for the beneficiary
• The remainder interest must equal at least 10 percent of the trust’s initial value under federal tax rules, which shapes how the trust can be structured

Because the trust must qualify as a valid trust under Massachusetts law in addition to meeting federal tax requirements, careful drafting matters. A trust that fails to satisfy either set of rules can lose its favorable tax treatment entirely.

Is a Charitable Remainder Trust Right for Your Estate Plan?

Charitable remainder trusts tend to work best for people holding significant appreciated assets who want both an income stream and a meaningful charitable legacy. Have you been sitting on stock or property that has grown substantially in value, wondering how to unlock that value without a large tax bill? This kind of trust may be worth exploring as part of a broader estate plan.

Talk to an Attorney About Charitable Giving Strategies

Structuring a charitable remainder trust correctly requires attention to both federal tax law and Massachusetts trust requirements. Our Norwood estate planning attorneys at Fisher Law, LLC help clients throughout the Greater Boston area evaluate whether a charitable remainder trust fits their goals. Don’t hesitate to contact Fisher Law, LLC today to schedule a confidential consultation.

Source:

irs.gov/charities-non-profits/charitable-remainder-trusts