You’ve worked hard to build your business into what it is today, and now you’re reaping the rewards. Maybe you’re considering sharing the wealth with a favorite charity or two. One way to do that is by creating a charitable remainder trust.

Charitable remainder trusts offer benefits for your business, your family, and your charity of choice. Read on to discover more about charitable remainder trusts and whether creating one makes sense for you.

What Is a Charitable Remainder Trust?

A charitable remainder trust, also called a CRT, is a type of irrevocable trust that provides income to the trust creator (or settlor) and designated income beneficiary(ies) while they’re still alive. After the death of the last income beneficiary, the assets in the trust go to the designated charity or charities.

Types of Charitable Remainder Trusts

There are two types of charitable remainder trusts:

• Charitable Remainder Annuity Trust (CRAT): A CRAT provides a fixed payment to the income beneficiary(ies) of the trust every year regardless of the principal in the trust.
• Charitable Remainder Unitrust (CRUT): With a CRUT, the annual income payment is calculated as a percentage of donated assets. This payment is recalculated annually based on the trust principal value, which has to be determined annually.

Another type of charitable trust is the charitable lead trust. Charitable lead trusts pay charities while the trust creator is alive rather than after their death. The remaining principal is paid to beneficiaries after the trust creator (settlor) dies.  These are outside the scope of this post.

How Do Charitable Remainder Trusts Work?

Here’s the basic gist of how charitable remainder trusts work:

1. First, you’ll need to create the trust with the help of an estate planning attorney. Note that the trust must be irrevocable (more on what that means below).
2. Once you’ve created the trust, you’ll transfer assets into it. You can put any type of assets into your trust, but ideally, they should be assets that have appreciated and will continue to appreciate in value over time. Such assets may include real estate, such as commercial or residential rental property, and stocks.
3. The trustee pays a set sum to the income beneficiary(ies) until the last of them dies. Some trusts only pay for a specific period of time, such as up to 20 years.
4. The trustee will file annual, fiduciary income tax returns.
5. When the last income beneficiary dies, the remaining assets in the trust pass to the charity or charities.

Benefits of a Charitable Remainder Trust

One of the biggest perks of charitable remainder trusts is that they can provide a lifetime income stream for you and your designated lifetime beneficiaries..

Another major benefit is that you can prevent your family from having to pay estate taxes on the assets after your death. Once you’ve transferred assets into the trust, they belong to the trust and are no longer a part of your taxable estate; however, you will report the gift and allocate a portion of your lifetime exemption from estate and gift tax to the value of the gift, but your estate will save estate and gift tax on the appreciation in value from the date of the gift to your date of death.

Charitable remainder trusts are an option for creative planning with appreciated assets, achieving a current charitable income tax deduction without recognizing capital gains tax.

Are There Any Drawbacks or Limitations?

The largest drawback of charitable remainder trusts is that they are irrevocable. Irrevocability is a double-edged sword: It can protect your assets from your beneficiaries’ creditors and lower estate taxes, but you will give up significant control of the asset and the trust, which is why experienced legal counsel is critical at the outset.

Charitable remainder trusts, being irrevocable, require their own tax identification number and must file their own tax returns.  Income beneficiaries must report their income payments and pay tax on those payments.

Is a Charitable Remainder Trust Right for You?

As mentioned above, charitable remainder trusts are ideal for business owners who:

• Have assets that have appreciated and will continue to appreciate
• Want to make significantcontributions to one or more charities
• Want to retain a lifetime income stream

Disclaimer: This blog post provides general information and does not constitute legal or tax advice. It is essential to consult with an attorney and tax advisor to determine if a CRT is suitable for your specific circumstances..

Contact an Estate Planning Lawyer To Learn More

Charitable remainder trusts offer impressive benefits, but they’re not right for every business owner. Not sure whether this type of trust makes sense for you? Reach out to Wilson Ratledge PLLC. Our attorneys will go over the perks and limitations of charitable remainder trusts to help you decide.

For a consultation, call Wilson Ratledge PLLC at 919-787-7711.

Business owners with high-value retirement accounts should consider taking measures such as a retirement plan trust to protect that wealth after their deaths. While listing a spouse as a primary beneficiary for your 401(k) or other retirement accounts is typically recommended given the benefits of a spousal rollover, indicating children as contingent beneficiaries won’t always ensure that they receive the full amount after your death and can have other unintended consequences, for example, if a child predeceases you with surviving children. 

Setting up trusts to serve as contingent beneficiaries of retirement accounts helps ensure the safe passage of retirement accounts to beneficiaries and protects them from bankruptcy, divorce, and other risks. 

What Is a Retirement Trust?

You’ve likely listed your spouse as the primary beneficiary of your retirement accounts and your children as the contingent beneficiaries. With these beneficiary designations, your spouse would be the first to receive your remaining retirement assets after your death, which is typically recommended to retain the benefits of the spousal rollover. However, if your spouse was no longer living or disclaims them, your children would be next in line. 

Several issues could impact this wealth transition to your children after your death.

• In the event of your child’s death, your assets could pass to his or her surviving spouse who may remarry and further pass your retirement assets outside of your family.
• In a divorce, a child’s spouse could take some of the retirement assets. 
• Your retirement assets could be subject to a child’s bankruptcy. 
• A child’s medical event could drain your retirement assets
• A business lawsuit or other litigious action could draw funds from your retirement accounts

You also have little control over how beneficiaries use those funds after your death. Should the retirement funds pass to minor children or grandchildren, the court may have to appoint a guardian to handle the money instead, with the assets passing outright to such children or grandchildren at age 18, far younger than you may wish. 

A retirement trust is an estate planning tool that can act as the new beneficiary of your retirement accounts if you are not married or if your spouse predeceases you. This gives you greater control over how and when beneficiaries receive assets from the trust and protects those assets from creditors and other risks. 

Using a Retirement Trust for Beneficiary Management 

Properly drafted retirement plan trusts qualify as see-through” trusts (which can be accumulation or conduit trusts). These trusts come with a few requirements:

• They must be irrevocable upon your death.
• All beneficiaries must be easily identifiable, eligible and named.
• They must be legal under state law.

Setting up a retirement plan trust with the help of an asset protection attorney ensures that you structure your trust correctly. 

You can choose to name your children as the trustees of the retirement trust if they are old enough and will responsibly manage this money. Otherwise, you can designate someone else to manage the trust. 

Once you have finished setting up the trust, you must simply update your beneficiary designations for your retirement accounts. You may be able to do so through your provider’s online portal or by calling your account manager. 

Typically, you will retain your spouse as the primary beneficiary, and list the trust as the contingent beneficiary, passing the retirement accounts to the trust if your spouse predeceases you. If you are married, we recommend you and your spouse consider setting up a retirement plan trust.

Pros and Cons of Retirement Trusts 

Using trusts for managing wealth in retirement and after death poses many benefits. With a retirement trust, you can: 

• Pass assets directly to the trust tax-free upon your death (though the trust, whether a see-through conduit or accumulation trust is still subject to required minimum distributions rules and such distributions are taxable) 
• Protect inherited retirement accounts from lawsuits, creditors, and divorce proceedings
• Control who will manage account funds after your death
• Prevent a spendthrift beneficiary from squandering their inheritance money

Create Your Trust With the Help of a Qualified Legal Team

Talking to an estate planning attorney can help you determine whether a retirement trust makes sense for your goals. 

At Wilson Ratledge, PLLC, we can help you create a trust that protects your wealth and stands up to legal scrutiny. We can also assist with tax planning, business law, and more. Request a consultation today to learn how we can serve you.

Whether you start a company from scratch or inherit a family-run business, it’s never too early to start planning for what happens if something unexpected happens to you, or for when you may want to retire or do something different. Business succession planning is a critical component of any estate plan. Trusts are often a key component of any family business continuity plan.

Continue reading, where we’ll share important details you need to know about these options and how they protect your North Carolina family business’s best interests now and for the future.

What Role Does a Succession Plan Play Within Business Continuity Generally?

Business continuity plans generally focus on the implementation of preventative measures that will ward off threats, including cyber attacks or natural disasters, that could compromise your business, and the identification of recovery strategies to deploy if harm occurs. Similarly, business succession planning is also a protective measure for your company. 

Why Having a Plan in Place for Your Company’s Transfer of Leadership or Ownership Is Necessary

Succession planning serves the role of giving your company the best chances of continuing and thriving if something were to happen to its current leadership – you. The advance planning results in a roadmap to be implemented if you suffer a disabling injury, untimely death, or simply retire.

In addition to protecting your legacy for your family, having a plan in place matters for many more reasons  For example:

• Employees: Your employees may worry about their jobs evaporating if something happens to you. Knowing that you have a plan in place may help with morale and productivity.
• Customers, vendors, investors, and partners: Having a plan in place can give them confidence in your operation, as it shows that you intend to keep your business going for the long term, and thus, they may be apt to do more business with you, offer more competitive rates, or consider supporting you in other ventures.

What Making a Succession Plan Entails

Business continuity planning like this may take different forms.  You might begin by identifying a successor to lead your company in your absence. Compile a list of candidates and investigate their interest in being part of your succession plan. Should you be unable to identify any suitable candidates in-house, you’ll want to consider looking outside your operation.

Once you identify the right candidate to keep your business going, you must invest time in preparing them to eventually lead your business, and you must document your plans for this transfer.  Even if your plan is for your business to be sold or for someone to “wind down” the business when you are no longer able to run it for any reason, it is important to plan for and document that as well.  While there are a multitude of documents that may be involved in succession planning, we focus below on the benefits of trusts.

How Trusts Figure Into Business Succession

Trusts can bring many beneficial elements to your succession plan.  Below are just some examples. 

• Ensure Seamless Leadership: Life can be unpredictable. A trust allows you to pre-appoint a successor trustee who can take the reins immediately, minimizing disruption and keeping your business running smoothly. The trust document can also be drafted to address unforeseen situations, providing stability during uncertain times.
• Maintain Family Harmony: Family businesses can be a breeding ground for conflict, especially when it comes to inheritance. Trusts can specify how to distribute ownership or profits, mitigating disputes and fostering continued family involvement in the business, if that’s your desire.
• Minimize Taxes: Strategic use of trusts can help reduce your estate tax burden. For instance, irrevocable trusts remove assets from your taxable estate, potentially saving your heirs a significant amount of money. Consult with a tax advisor to explore the specific tax implications for your situation.
• Protect Your Legacy: Beyond financial benefits, trusts can be used to ensure your business continues to operate according to your values. A “purpose trust,” for example, prioritizes the mission and vision of the company over short-term gains. [link prior post about “Patagonia”]
• Provide Flexibility and Control: Trusts offer a high degree of customization. You can specify who benefits from the trust, when they receive distributions, and even include conditions for continued involvement in the business.

Choosing the Right Trust

There are various types of trusts, each with its own advantages and drawbacks. A revocable living trust allows you to retain control of the assets while you’re alive, but upon your passing, the trust avoids probate, saving time and money. An irrevocable trust, on the other hand, relinquishes control but offers greater tax benefits.

How the Attorneys at Wilson Ratledge Can Help You Plan for Your Family and Company’s Future

If there’s one detail you should know about a family business continuity plan, it’s important not to put it off. The unexpected can suddenly happen to anyone. Delaying having the appropriate legal documents drafted, funding trusts, or otherwise engaging in succession planning can complicate transfers of business, leading to the unintended demise of the business that you wanted to continue to exist and provide for your family once you were gone. 
Crafting an appropriate estate and succession plan for your business is complicated, and you should seek competent business and trusts and estate planning legal counsel. Contact our law firm, Wilson Ratledge, now to discuss your goals for keeping your business in operation after you leave it, for any reason.