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Taking Care of Mom and Dad: Charitable Remainder Trusts

Charitable remainder trusts (CRTs) are best if your parents have a lot of money tied up in investments that have appreciated over the years, such as stock, bonds, a home or a business.

If those assets aren't providing them with dividends, interest or other income, your parents may need to sell the asset and buy some thing else that will provide them with income. But, when they sell something they've owned for a long time, they're probably going to owe a lot of taxes.

A charitable remainder trust allows them to avoid the tax bite and do some altruistic good. When your parents use a CRT, they move assets into the trust and name a qualified, tax-exempt charity (or several) as beneficiary. They usually remain trustees.

Once they place the assets in the CRT, the trust can sell the assets without paying taxes and invest the proceeds in something that provides current income for your parents. They are entitled to that income for as long as they live; when they die, the principal goes to charities they named when they set up the trust.

A close variation, called a charitable remainder unitrust (CRUT), allows your parents to receive a fixed percentage of the trust's value each year, rather than a set dollar amount.

Many people prefer the CRUT because it can provide some inflation protection: As the trust (presumably) grows in value each year, so, too, will the dollar amount of your parents' annual withdrawal allowance.

With either a CRT or CRUT, the remainder interest that will eventually go to charity has a value today, established with a financial calculation, using an "assumed" future interest rate.

IRS publishes the interest rate each month to be used in this calculation of the value -- in today's dollars -- of the charity's right to receive the remainder of trust assets at the specified future date. That is the amount your parents are giving away. It is, therefore, the value of the current income tax deduction.

A big additional benefit is that the donated property, and all future price appreciation, is removed from your parents taxable estate.

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