The Disadvantages of Charitable Remainder Trusts

As a component of estate planning, charitable remainder trusts (CRTs) allow you to donate to a charity and receive income from the donated assets during your lifetime. When you die, the charity receives the remaining assets. To make an informed decision, review the possible disadvantages of a CRT before establishing one.

CRTs Are Irrevocable

A charitable remainder trust is irrevocable. Once you establish one, you cannot cancel it. Therefore, it's important to think through all the possible options and life scenarios before setting up this type of trust.

Impact on Heirs

The portion of the estate that you donate to the trust is not available to your heirs. After your death, the balance of the trust (the principal) passes to the charity. If you do not have heirs or your heirs can manage for themselves, this might not be a concern.

Investment, Tax and Financial Implications

Because the CRT is a tax-exempt entity, be aware of investment and tax concerns. You might be restricted in the types of investments you can make with the trust assets. For example, you cannot invest CRT assets in a business in which you have a controlling interest. You also will not avoid capital gains tax on property transferred to the CRT if you finalized the sale prior to transfer. Further, if your contribution to the charity was considerable, you may not be able to deduct its full amount on your tax return in the same year as the donation. As a donor, you are also responsible for the costs of any legal fees, appraisals and title work prior to transferring assets to the charity.

References

About the Author

Helen Trencher has been writing professionally since 1991, including instructional materials, business proposals, college seminars and workshop guides. In 2000 she published an article on the health benefits of drumming for "Colorado Mature Lifestyles." Trencher holds a Bachelor of Arts in education from Lehman College and a Master of Science in education from Fordham University.