Charitable Remainder Trusts are irrevocable trusts that afford the opportunity to donate assets to a charity and draw down an income, either for life or a specific term. Establishing a Charitable Remainder Trust can include the transfer of cash, property, or other assets. The Charitable Remainder Trust, once established, pays income to at least one living beneficiary or can be established for multiple beneficiaries. At the end of life or the term of the trust, the remainder is then distributed to the charitable entity chosen.

Benefits of a Charitable Remainder Trust

A Charitable Remainder Trust is a potentially advantageous way for the philanthropically minded to manage their assets and charitable donations, while realizing a tax benefit and drawing down an income.

The income received from a Charitable Remainder Trust is formulaic and consistent, dependent upon the terms established for the trust. Additionally, it may be possible to avoid capital gains taxes based on the sale of assets transferred to the trust. The donation of an asset to the charitable remainder trust provides a partial charitable deduction and removes the asset from the grantor’s estate.

A Charitable Remainder Trust must be designated for distribution to a Registered 501(C)3 organization and can include distribution to multiple charitable entities if so desired.

Business Owners and Charitable Remainder Trusts

A Charitable Remainder Trust might prove particularly beneficial to a business owner in anticipation of the sale of their business. This is due to the construct of the Charitable Remainder Trust itself as it can function as a tax savings plan in the event of the sale of a business.

When shares of a business are granted to the charitable remainder trust prior to a liquidation event, the capital gains taxes that would be owed are eliminated and the grantor is able to get a charitable deduction to help offset other gains, including the portion of the business ownership that may not have been granted to the charitable remainder trust.

If the grantor makes themselves the beneficiaries of the charitable remainder trust, they can then receive an income stream from the trust to supplement lifestyle for a defined period laid out in the trust.

What to Consider When Establishing a Charitable Remainder Trust

For business owners, a Charitable Remainder Trust proves to be an alternative best suited to those charitably inclined with a business value of at least $5 million dollars or higher.

While a Charitable Remainder Trust is a strategically advantageous option in this case, there are alternatives for business owners whose enterprises meet a different value threshold or for those seeking a solution outside of charitable donation.

One such alternative is a Donor-Advised Fund. Donor-Advised Funds are a type of charitable giving vehicle that allows donors to make a charitable contribution, receive an immediate tax deduction, and then recommend grants to charitable organizations over time. They have become increasingly popular in recent years as a way for donors to make a significant impact on the causes they care about while also simplifying their charitable giving.

To read more on Donor-Advised Fund, visit our blog post What Is A Donor Advised Fund?

For those business owners who are not considering a sale of their business but would still like to realize the benefits of tax deductions, there are a number of practical and actionable strategies that could be put to immediate use to achieve this goal.

Visit our blog post 10 Ways for Business Owners to Maximize Their Tax Deductions for more information.

In Summary

The benefits of a Charitable Remainder Trust and its potential tax and asset implications are nuanced and should only be undertaken under the counsel of your trusted financial advisor or estate attorney. This holds true for any financial planning consideration a business owner or individual may consider in securing their financial well-being and future.

Disclosures: While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. Donors are urged to consult their attorneys, accountants or tax advisors with respect to questions relating to the deductibility of various types of contributions to a Donor-Advised Fund for federal and state tax purposes. Opinions expressed in the attached article are those of the author and are not necessarily those of Raymond James. All opinions are as of this date and are subject to change without notice.   

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