A Fidelity Charitable Remainder Trust (CRT) is a powerful philanthropic and financial planning tool that allows individuals to support charitable causes while simultaneously securing income for themselves or their beneficiaries. Managed by Fidelity Charitable, one of the largest public charities in the United States, this trust structure offers a unique blend of altruism and financial benefit. It is designed for donors who wish to contribute to charity but also require a steady stream of income during their lifetime or for a specified period. By leveraging appreciated assets, such as stocks or real estate, donors can avoid immediate capital gains taxes, receive a charitable income tax deduction, and ultimately make a significant impact on their chosen causes.
The mechanics of a Fidelity Charitable Remainder Trust involve several key steps. First, the donor irrevocably transfers assets into the trust. These assets are typically highly appreciated, as doing so allows the donor to bypass capital gains taxes that would be incurred if the assets were sold outright. Once the assets are in the trust, they are sold by Fidelity Charitable, and the proceeds are reinvested into a diversified portfolio. The trust then pays an income to the donor or other named beneficiaries for a term of years or for the life of the beneficiaries. After the income period ends, the remaining assets in the trust are distributed to one or more qualified public charities, including those recommended by the donor through Fidelity Charitable’s Giving Account.
There are two primary types of Charitable Remainder Trusts, both of which are offered by Fidelity Charitable. The Charitable Remainder Annuity Trust (CRAT) provides a fixed annual income stream, which is determined as a percentage of the initial fair market value of the assets contributed. This amount remains constant regardless of fluctuations in the trust’s investment performance. Conversely, the Charitable Remainder Unitrust (CRUT) pays a variable income based on a fixed percentage of the trust’s assets, which are revalued annually. This means that the income can increase or decrease depending on how well the investments perform, offering potential for growth but also introducing variability.
The benefits of establishing a Fidelity Charitable Remainder Trust are multifaceted. From a tax perspective, donors receive an immediate income tax deduction based on the present value of the remainder interest that will eventually go to charity. This deduction can be carried forward for up to five years if it cannot be fully utilized in the year of contribution. Additionally, by contributing appreciated assets, donors avoid paying capital gains taxes on the sale, allowing more money to be invested for growth and income. The trust itself is tax-exempt, meaning it does not pay taxes on investment income, further enhancing its efficiency.
From a financial planning standpoint, a CRT can serve as a valuable component of retirement planning. It provides a predictable income stream, which can be especially useful for individuals looking to supplement their retirement income. For those with highly concentrated stock positions, such as company stock, a CRT offers a way to diversify without incurring a significant tax burden. Moreover, it can help reduce the size of a taxable estate, potentially lowering estate taxes for heirs. The ability to support charitable causes aligns with many individuals’ desires to leave a lasting legacy, making it an emotionally rewarding strategy as well.
Fidelity Charitable brings several advantages to the administration of a Charitable Remainder Trust. As a well-established organization, it offers robust investment management services, ensuring that the assets within the trust are managed prudently to meet income objectives and growth targets. Donors can choose from a range of investment pools or work with Fidelity’s investment professionals to create a customized strategy. Additionally, Fidelity Charitable handles all administrative tasks, including tax reporting, compliance, and distributions, relieving donors of the burden of ongoing management. This allows donors to focus on their philanthropic goals without getting bogged down in paperwork.
When considering a Fidelity Charitable Remainder Trust, it is important to be aware of the associated costs and complexities. Establishing a CRT requires legal and financial expertise, and there are costs involved in drafting the trust document and ongoing administrative fees. Fidelity Charitable charges an annual administrative fee based on the value of the trust assets, which covers investment management, reporting, and other services. Additionally, the trust is irrevocable, meaning that once assets are transferred, they cannot be reclaimed by the donor. This commitment requires careful consideration and planning to ensure that the trust aligns with long-term financial and charitable objectives.
To illustrate the potential impact, consider a hypothetical example. Suppose a donor contributes $1 million worth of highly appreciated stock with a cost basis of $200,000 to a Fidelity Charitable Remainder Unitrust. The trust sells the stock and reinvests the proceeds, avoiding capital gains taxes on the $800,000 gain. The donor receives a charitable income tax deduction of approximately $200,000 (depending on age and IRS discount rates). If the trust is structured to pay a 5% annual income, the donor would receive variable payments each year. After 20 years, assuming the trust grows at a moderate rate, the remaining assets would be distributed to charity, potentially amounting to a significant philanthropic gift.
In conclusion, a Fidelity Charitable Remainder Trust is a sophisticated vehicle that blends charitable giving with financial planning. It offers substantial tax advantages, income benefits, and the opportunity to make a meaningful charitable impact. However, it is not suitable for everyone. Prospective donors should consult with financial advisors, tax professionals, and legal counsel to evaluate whether a CRT aligns with their goals. For those with appreciated assets and a desire to support charity, it can be an exceptionally effective strategy. Fidelity Charitable’s expertise and resources make the process streamlined and efficient, allowing donors to achieve both their financial and philanthropic aspirations with confidence and ease.