Charitable remainder trusts can be a good tool to avoid a steep tax penalty. However, there are some challenges.

Charitable remainder trusts can be helpful in avoiding some heavy taxation but one should beware of the dangers, according to the Wills, Trusts & Estates Prof Blog in “The Charms and Dangers of the Charitable Remainder Trust.”

There are some tax consequences for elder Americans who are planning retirement, moving and downsizing. One way around this problem is to create a charitable remainder trust.

This is irrevocable trust in which people can place assets without a tax penalty. The trust settlor can continue to control the assets and draw an income from them. Anything left in the trust after the settlor passes away, goes to charity.

The IRS scrutinizes charitable remainder trusts very closely.

The agency requires that at least 10% of the assets put into the trust, ultimately go to charity. If that does not happen, there can be steep tax penalties.

To help facilitate this, the IRS requires that the trusts be monitored for possible exhaustion of funds during the settlor’s lifetime. If the trust is in danger of exhaustion, it is dissolved and the settlor will face severe tax penalties.

An estate planning attorney can advise you on creating an estate plan that fits your unique circumstances and may involve the use of a charitable remainder trust.

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