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· Types of Charitable Remainder Trusts
· Charitable Remainder Unitrust
· Charitable Remainder Annuity Trust
· Other Facts you should know
Charitable Remainder Trust
A Charitable Remainder Trust ("CRT") is a tax-advantaged planning tool that produces both charitable and estate planning benefits. A CRT uses your assets to provide income to you (spouse or someone else you designate) for life (or some stipulated time period) and then transfers the assets to the charity(s) of your choice.
Advantages of CRT
- Give to charity
- When the last income beneficiary dies or the trust terminates, the designated charity becomes the recipient of the trust's assets.
- Reduce your taxes
- Your charitable gift removes the assets from your estate, lowering its ultimate tax burden. At the same time, you get an income-tax deduction for the amount that is considered a charitable gift.
- Your property or stock can be sold with no capital gains tax, from which charities are exempt, at the time of the sale. The proceeds can then be reinvested in a diversified portfolio for growth, income or total return.
- Produce income
- The trust pays you and any designated beneficiaries, usually a surviving spouse or child, income for life. Or it can pay income until a fixed time in the future.
- Asset Protection
- A CRT protects your assets, may lower taxes, and generates income for you or others while ultimately funding charitable causes to ensure your charitable wishes.
Types of Charitable Remainder Trusts
There are two formats for the distribution:
- Charitable Remainder Unitrust (CRUT) - a unitrust values the trust's assets annually and pays the designated income beneficiary(s) a fixed percentage of that amount.
- Charitable Remainder Annuity Trust - an annuity trust pays the designated income beneficiary(s) a fixed annual amount, based on initial funding, regardless of the trust's year-to-year value.
Charitable Remainder Unitrust (CRUT)
The most popular and flexible type of life income plan is a charitable remainder unitrust (CRUT). Cash, securities, real property, or other assets are transferred into the trust. The trustee manages the trust assets and pays you or others you choose a variable income for life or for a term of years. When the trust terminates, the remaining assets in the trust are transferred to charity or other qualified charitable entity. With this type of charitable remainder annuity, you are allowed to make additional contributions through the years. The annual income stream is a fixed percentage of the trust's principal, which is revalued each year.
The typical donor:
- Needs income for life or a specified term of years.
- Desires more income as the trust value increases.
- Tolerates some investment risk to provide for growth.
- Wants to make additional gifts to the trust.
- Is between the ages of 55 and 80.
Gift features and benefits:
- Income for life (variable payments)
- Possibility of multiple beneficiaries
- Assets transferred to the trust can be reinvested
- Ability to choose the trustee (may be the donor)
- Flexible investment possibilities for the beneficiary
There are four types of Charitable Remainder Unitrusts:
- A standard unitrust pays the stated amount from the trust regardless of how much income is earned. The payout is the stated percentage of the trust assets as valued annually.
- A net income unitrust pays the stated amount from the trust to the extent of income earned in the trust without invading principal. The payout is the stated percentage of the trust assets as valued annually.
- A net income with makeup unitrust provides annual payouts equal to the lesser of the fixed percentage of the value of the trust, revalued annually or the income of the trust, as determined by state law or the governing instrument. It has the ability to makeup income in subsequent years if the income earned is less than the stated payout rate. Often used to supplement retirement savings.
- A flip unitrust is a net income unitrust that "flips" to a standard unitrust when a specified date or event occurs such as a birth, a death, or the sale of a hard-to-market property.
Tax Advantages
- Avoids immediate capital gains taxes on the sale of appreciated assets by the trust.
- Generates a current-year income-tax deduction on assets transferred to the trust.
- Reduces estate tax liabilities as assets in the trust are removed from the grantor's taxable estate.
- Income accumulated in the trust is not taxed to the trust.
- Income used for payments to the grantor or others is taxable to them.
Charitable Remainder Annuity Trusts (CRAT)
In general, with this type of trust, you and/or your spouse would retain an income interest in the trust for life. The remainder interest - that is, the interest in the principal at the death of you, your spouse and all beneficiaries - would belong to the charity.
Once you establish a CRAT, you cannot make additional contributions to the trust. Your charitable remainder annuity trust will provide a fixed annual income stream stated in dollars or as a percentage of the trust's initial investment fair market value.
Tax Advantages
- Avoids immediate capital gains taxes on the sale of appreciated assets by the trust.
- Generates a current-year income tax deduction on assets transferred to the trust.
- Reduces estate tax liabilities as assets in the trust are removed from the grantor's taxable estate.
- Income accumulated in the trust is not taxed to the trust.
- Income used for payments to the grantor or others is taxable to them.
Other Facts You Should Know about a Charitable Remainder trust
How do I Make a Gift Using a Charitable Remainder Trust?
A trust document tailored to your needs is drafted. Your assets are transferred to the trustee you choose. The assets are usually sold by the trustee and reinvested to match your income objectives. You receive variable income for your life or a specified period of years. At your death or the end of the period, the remaining assets are transferred to the charity of your choice.
The trust provisions you have control of when drafting your charitable remainder trust include:
- Choosing a trustee.
- Designating the income beneficiaries.
- Naming the charitable remainder beneficiaries.
- Deciding on a payout rate for the trust.
- Determining the frequency of the payments.
- Selecting the term of the trust.
Self-Dealing
With a charitable remainder unitrust, certain activities known as "self-dealing" are prohibited. Self-dealing rules prevent a donor who has transferred property to a trust, or a donor's family, from dealing with the trust. Actions considered to be "dealing" include buying from, selling to, and renting from the trust, and continuing to do business with the trust. The donor, the trustee, members of their families, and entities such as corporations in which they have substantial interests are "disqualified persons" and are prohibited from dealing with a trust that has been a recipient of the donor's property.
Income distributions are taxed in the following order:
- Ordinary income
- Capital gain income
- Tax-free income
- Return of principal (corpus)
Federal tax law outlines a tier system that determines the taxation of trust income to income beneficiaries of a charitable remainder trusts. Whether or not all income produced by the trust is distributed to the income beneficiary, the trust pays no income taxes on its earnings as long as it has no unrelated business taxable income (UBTI). The income to the income beneficiary from the trust is taxed based on the historical pattern of how income in the trust was earned.
Income tax deduction
The "income tax deduction" you receive from a charitable remainder trust is based on an Internal Revenue Service (IRS) formula that considers the ages of the donors and income beneficiaries, the payout of the trust, and an IRS index rate known as the Applicable Federal Rate (AFR). The older you are, the larger your income tax deduction. Generally, if the trust is for a term of years rather than for life, the income tax deduction will be larger. If the present value of the remainder interest equals at least 10% of the value of assets transferred into the trust, the trust will qualify as a charitable remainder unitrust.
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