Can You Borrow Against a Charitable Remainder Trust?

Yes, you can borrow from a charitable remainder trust, but it lowers the trust's value and your stream of income. The trust lets you build tax-free income with compound interest on assets in the trust. You get a steady income and can sell assets without capital gains tax. You claim tax deductions and avoid estate taxes on the gifted assets. Careful planning of the trust can reduce the impact of borrowing from it later.

Reduced Taxes

When you set up a charitable remainder trust, you pick a charity as beneficiary and transfer assets that qualify as charitable contributions into the trust. The income tax deductions are based on the estimated remainder interest that eventually goes to the charity of your choice when the trust term ends. Contributions to the trust are removed from your estate. You elude estate taxes because the trust is an irrevocable trust, meaning it becomes separate from you. A trustee manages assets.

Spend and Reinvest

The trust brings you and your heirs steady income for a certain period of time, depending on how you arrange it. The trusts are typically designed to pay out through an annuity with a fixed annual income or a fixed percentage of the valued assets. You have the freedom to sell trust assets, avoid capital gains tax and reinvest proceeds to continue the financial growth within the trust.

Borrowing Tax

Borrowing money from the trust may depend on how you set it up. You can usually retain the tax-exempt status for the trust, but get taxed on borrowed income for the tax year. You might want to take money out for improvements on property in the trust, but it still counts as unrelated taxable income. Gains from the sold property could suffer 50 percent taxation. As a result, this move means you greatly reduce the value of the trust, the steady income you have been receiving and the amount going to the charity.

Alternative Planning

You have options when setting up the trust, which include funding it with additional cash or securities with the intent of eventually using the money for improvements on a property or business. Since an irrevocable trust can’t be changed, you would need to allow additional contributions in the trust agreement. The trustee could also sell a small interest to the remainderman or charity, dividing proceeds of a sale to the charity and the trust for the needed cash.

About the Author

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