Charitable remainder trusts can be a great vehicle for elderly people to downsize without paying a steep tax penalty. They can also be very dangerous, if not handled correctly.
One problem many older Americans have, is that they would like to retire, move or just downsize. However, the tax consequences of doing so can be difficult to get around.
An elderly couple that has lived in the same home for decades would have to pay capital gains taxes, if they sell the home. This could make it more difficult to sell the home and have the money to move somewhere else.
One way around this problem is to create a charitable remainder trust.
This is an irrevocable trust in which people can place assets without a tax penalty. The trust settlor can continue to control the assets and draw an income from them. Anything left in the trust after the settlor passes away, goes to charity.
However, charitable remainder trusts have some dangers, as the Wills, Trusts & Estates Prof Blog explains in “The Charms and Dangers of the Charitable Remainder Trust.”
The IRS scrutinizes charitable remainder trusts very closely.
The agency requires that at least 10% of the assets put into the trust, ultimately go to charity. If that does not happen, there can be steep tax penalties.
To help facilitate this, the IRS requires that the trusts be monitored for possible exhaustion of funds during the settlor’s lifetime. If the trust is in danger of exhaustion, it is dissolved and the settlor will face severe tax penalties.
Charitable remainder trusts can be a great tool. However, because of the drawbacks, they should only be considered upon the proper advice of an estate planning attorney.
Reference: Wills, Trusts & Estates Prof Blog (Dec. 29, 2017) “The Charms and Dangers of the Charitable Remainder Trust.”