Simple English definitions for legal terms
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A charitable remainder trust is a type of trust where someone gives a lot of money or valuable things to a trust that can't be changed. The money or things will go to charity when the person who gave them dies, but the person who gave them (or other people they choose) will get some of the money or profits from the trust while they are still alive. The government will let the person who gave the money or things take a big tax deduction when they give it to the trust, and they can use the money they save on taxes to buy an insurance policy that will give their children money when they die. This way, the person who gave the money or things can give to charity, get some money back, and still give their children a lot of money when they die. The only problem is that the money or things they gave to the trust can't be taken back or used for anything else.
A charitable remainder trust is a type of trust where a person (the donor) puts a large amount of money or assets into an irrevocable trust. The trust is managed by an independent trustee and the assets will go to a charity after the donor's death. However, during the donor's lifetime, they (or specific beneficiaries) will receive regular payments from the trust.
For example, let's say John wants to donate $1 million to a charity but also wants to receive regular payments during his lifetime. John can create a charitable remainder trust and put the $1 million into the trust. The trust will pay John a certain amount of money each year, and after John's death, the remaining assets will go to the charity.
The IRS allows a large tax deduction in the year the funds or assets are donated to the trust. The tax savings can be used to buy an insurance policy on the life of the donor, which will pay the donor's children the proceeds upon the donor's death. This way, the donor can make a gift to charity, receive a return on their money, and still arrange to make a large gift at death to their heirs.
However, the disadvantage of a charitable remainder trust is that the assets are permanently tied up or committed, meaning the donor cannot change their mind and take the assets back.