Placing your income-producing assets in a charitable remainder trust can be a world of win. While you're alive, you get the income from the stocks, rental properties or other assets. When you pass on, the charity gets the property. Borrowing against such a trust -- a home equity loan to improve trust real estate, for instance -- is legal, but it's usually a bad idea.
A charitable remainder trust is irrevocable. You can't take the trust assets back out, and unlike a revocable trust you probably won't serve as trustee. The charity you plan to give the assets to can serve as the trustee. You can also ask a friend or business associate of yours to take the gig. The trustee has an obligation to invest and manage the CRT assets wisely, which can include buying new assets or improving old ones.
Borrowing money to invest is common for individuals but dangerous for CRTs. When a CRT sells assets, there's no capital gains tax. If, say, you place stock in a CRT, it can sell the stock at a profit without paying tax, then pay you income from the sale. If the trustee borrows money against a CRT asset, income from that asset may become taxable. Even if the loan is for the benefit of the trust, the tax bite can take a huge chunk out of the CRT's value.
Avoid the Trap
If borrowing leaves the trust vulnerable to the IRS, it reduces both the income the CRT pays you and the value of what you leave to charity. A more effective solution than borrowing, if it's within your budget, is to include some liquid assets -- cash or easy-to-sell securities -- in the CRT. That way, your trustee has money when needed. If the trust documents let you make extra contributions after you set up the CRT, you can add money when necessary.
Think Before Acting
Establishing a CRT is a big commitment. Once you commit real estate, stocks or other investments to the trust, they're out of your control forever. State law may allow you some flexibility, such as changing which charity gets the assets, but most of the terms are set in stone. Before you put any assets in the trust, go over all the details. Any time you take an irrevocable step, you want to be absolutely sure of what you're doing.