Charitable remainder trusts present a chance for you to make a final contribution to organizations of your choice and also reduce your estate tax bill. However, there is a significant drawback to consider. If you are considering establishing a charitable remainder trust as part of your estate planning, here is what you need to know.

How Does It Work?

A charitable remainder trust has many similarities to other types of trusts. One of the main similarities is that assets are transferred to the trust for distribution at a later time. However, instead of distributing the contents of the trusts solely to beneficiaries, such as a surviving spouse or children, part or all of the contents would go to charity organizations.  

The establishment of a charitable remainder trust can help to reduce your estate's tax burden. The assets in the trust can still be taxed, but the estate will receive a deduction for making a charitable donation.  

How Are the Assets Distributed?

As long as the trust exists, your beneficiaries and selected charities will receive funds from it. You can opt for the funds to be distributed as a percentage of the trust or a fixed rate. Regardless of which method you select, the funds will be paid out on a yearly basis for the life of the trust.  

What Is the Drawback?

Even though a charitable remainder trust can help you avoid or limit estate taxes, it is still an irrevocable trust. Once assets are placed into the trust, they are under the control of the trustee. While establishing the trust, you will designate a point at which a charity can assume control, but until then, the trustee makes decisions for it.  

If the trustee is inexperienced in financial matters or is unable to follow your wishes for the trust, the funds that are intended for your beneficiaries and the charities could be mismanaged. To avoid this, it is imperative that you select a trustee who not only understand how to financially manage a trust, but is willing to follow your instructions. Some people rely on professional trust managers to handle their charitable remainder trusts.  

Your estate planning attorney can help you determine if a charitable remainder trust is the right move for you. If so, he or she can help you establish it. If not, the attorney can recommend a different option for helping out charitable organizations and reducing your estate tax bills.