Understanding Estate Taxes
24. Charitable remainder trust
A charitable remainder trust lets you convert an appreciated asset (like stocks or investment real estate) into a lifetime income. It reduces your income taxes now and estate taxes when you die, and you pay no capital gains tax when the asset is sold. Plus, it lets you benefit a charity that has special meaning to you.
When you set up a charitable remainder trust, you transfer the asset into an irrevocable trust. You receive an immediate charitable income tax deduction which reduces your current income taxes. Transferring the asset to the trust removes it from your taxable estate, which will reduce estate taxes when you die.
The trustee then sells the asset at full market value, paying no capital gains tax, and re-invests in income-producing assets. For the rest of your life, the trust pays you an income. And since the principal has not been reduced by capital gains tax, you receive more income over your lifetime than if you had sold the asset yourself.
After you die, the remaining trust assets go to the charity(ies) you have chosen. That's why it's called a charitable remainder trust.
NOTE: You can use the income tax savings and part of the income you receive from the trust to fund an irrevocable life insurance trust. The trustee of the insurance trust can then purchase enough life insurance to replace the full value of the gifted asset.