How Does A Charitable Remainder Trust Fund Work?

Legislation announced way back in 1969 by the US congress has paved the way for many citizens to invest money in charitable funds of different types. The advantage of investing in these charitable trusts is that any funds invested are totally deductible against various forms of taxation. Where it has proved to be exceptionally beneficial to people in the higher tax brackets is where they have made windfall profits either from sales of property or stocks and shares. These profits can be placed in trust and prevent the need for paying any form of capital gains tax at source.

The same legislation also applies in income tax and estate tax, but because the level of taxation in capital gains tax is so high it is especially appealing. Statistics show that people who sell property or shares are usually reaching retirement age, and are planning their estate to meet this new change in their circumstances. They want to both provide for their future and enjoy helping those needier than themselves. They invest in these funds in the knowledge that their close family have been provided for, as any funds invested in a charitable remainder trust fund cannot be returned to the donator in a direct form.

Once the fund has been established and has been funded, then a trustee is appointed. The trustee may even be the person who donated the money, usually working with a lawyer or bank official. The trustee's role is to pay an agreed percentage of the fund or any incomes generated by it to either the charitable or non-charitable beneficiaries of the fund. Generally non charitable beneficiaries are the donor who can claim back a certain percentage of the annual income of the fund with the balance going to charitable beneficiaries. This way the donors can enjoy a tax paid income, which will be sufficient to their needs. This can vary between 5% to 50% of the income of the trust in any fiscal year. At the same time the donors enjoy the pleasure and recognition of seeing the fruits of their life's work being put to good use. Administering a fund can involve relatively high fixed costs, and for this reason it is only really viable where relatively high sums of money are involved.

Another aspect of charitable remainder trust funds that have to be taken into account is that they are not considered part of the donor's estate and therefore cannot be bequeathed to anyone. Donors planning their estate should take that fact into account when they decide to take care of their siblings after they have passed on. The only way that children can benefit from their parent's donating money through as charitable remainder trust fund is by them taking the savings made in income tax and use it to fund what is known as Irrevocable Life insurance trust. Through this trust the trustee can purchase enough life Insurance to replace the full asset value for the children or any other beneficiaries. The proceeds from the life insurance will not be included in the donor's estate in the event of their deaths and therefore be divided up in cash without the need to pay any estate taxes. This is a very interesting and fair condition that virtually allows the donor to save paying capital gains tax, take care of themselves in their retirement years, and also leave something behind for their loved ones.

These are the reason why it is if you are about to sell some property or bonds, then you should seriously consider learning how does a charitable remainder trust fund work and if it can be the answer for you.