Charitable giving takes many forms and, for many people, becomes an important component of their estate planning.

In addition to supporting a cause that means something to them, some estate planning tools allow people to provide a financial legacy for their heirs at the same time. The charitable remainder trust is one example of this.

How a charitable remainder trust works

At its core, a charitable remainder trust is a trust into which a person titles assets. Upon the death of the person who created the trust, his or her heirs receive an income stream from the trust. When the heirs die, the remaining assets in the trust flow to a designated charity.

Charitable remainder trusts and retirement savings

Forbes explains that a charitable remainder trust may be named as the beneficiary of a person’s 401K or individual retirement account. Depending on the age of the person’s children to be named as heirs in the trust, those heirs may end up receiving more money than if they were named as the beneficiaries on the retirement accounts directly. This may happen due to the tax exemptions enjoyed by charities and charitable trusts.

However, an heir who receives money from a charitable remainder trust must claim that money as regular income and pay taxes on it each year.

Charitable remainder trusts and other assets

According to Barrons, retirement savings are not the only assets that may be titled into a charitable remainder trust. The proceeds from a real estate sale, such as a family home, may also be funneled into this type of trust. This action may prevent the need to pay capital gains taxes.