Charitable Remainder Trust: Meaning, How it Works

A charitable remainder trust is an irrevocable trust that pays income to the donor or other noncharitable beneficiary for a set period. Whatever is left after that time period, called the remainder, goes to charity.

This type of trust works in the reverse of a charitable lead trust, which supports a charitable organization first and then passes the remainder to personal beneficiaries such as family members. Both types of charitable trusts are often called “split interest” trusts because they split payments between the donor and a noncharitable beneficiary.

Charitable trusts support IRS-qualified public charities and private philanthropic foundations; they must meet specific requirements to qualify for tax-exempt status. Otherwise, the IRS considers them private foundations, which have their own tax rules and regulations.

» MORE:

Pros and cons of a charitable remainder trust

Types of charitable remainder trusts

Charitable remainder trusts can be structured as a fixed amount like a regular, annual salary (annuity trust) or as a percentage of the trust's total value (unitrust).

» MORE:

How a charitable remainder trust works

• The

  grantor

  (creator) identifies their beneficiaries

  , both charitable organizations and non-charitable heirs such as a spouse, children or grandchildren.

• The grantor selects a trustee to manage the trust.

  This can be a friend, family member or a third party, such as a bank.

• The grantor funds the trust with assets,

  including cash, real estate, publicly traded securities and certain types of closely held stock, bonds and other investments.

• The grantor drafts a trust deed

  with an estate planning attorney or other professional. In some states, you may need to register your charitable trust with a government agency such as the state attorney general or secretary.

• Every year, the grantor or trustee fills out tax forms

  for the trust, typically IRS Form 990. You may also have to fill out a split-interest trust return, IRS Form 5227, or a trust return, IRS Form 1041 or 1041-A.

• The trustee ensures the beneficiaries receive their income

  from the trust every year.

» MORE