Charitable Remainder Trusts

For many years the charitable remainder trust has been a popular vehicle for charitably minded individuals who are not quite ready to make outright gifts of assets. These trusts essentially provide for a lifetime (or other long-term) stream of payments to the donor (or other designated party), while at the end of the process the “remainder” (what is left in the trust), is required to be given to a charity. Along the way, a properly structured Charitable Remainder Trust results in the following:

  • A charitable contribution income tax deduction;
  • A potential reduction to one’s taxable estate (when the individual who makes the trust retains no right to a payment stream);
  • An income stream for the giver, his or her family members, or other designated third parties;
  • The opportunity to sell highly appreciated assets and not recognize a gain (because the trust itself is tax exempt);
  • The potential for accumulated untaxed income (to the extent it is eventually received by the charity); and
  • The satisfaction of providing for a cherished institution (provided the institution qualifies as a 501(c)(3) organization under the Internal Revenue Code).

There are two basic forms of Charitable Remainder Trusts. The first is a Charitable Remainder Unitrust or “CRUT.” The second is a Charitable Remainder Annuity Trust or “CRAT.”

The Unitrust provides for a percentage of the trust corpus (anywhere from 5% – 50% of the Trust value, measured yearly) to be paid to the “income beneficiary” on a yearly basis. The Annuity Trust provides for a flat amount (a “sum certain”) to be paid to the income beneficiary on a yearly basis. That sum certain also has to fall between 5% and 50% of the trust’s assets. Usually the income beneficiary’s payment term will be his lifetime, but it could be for a term of years.

Whatever the payout schedule and duration, from an actuarial perspective the value of the remainder to go to the charity at the end of the income beneficiary’s term of payments has to be 10% or greater of the initial amount put into trust. That actuarial calculation depends on the age of the income beneficiary (or the term of years), the interest rates in effect around the time of the gift (specifically, the IRS mandated “applicable federal rate”) and the payout rate. However, it is essential to make the calculation for both purposes of qualifying the trust and calculating the tax deduction(s) the donor would be entitled to.
As mentioned above, the trust itself is tax exempt. However, an information return has to be filed with the IRS for the trust and there is income tax payable to the non-charity beneficiary to the extent that income is paid out to him.

The charitable remainder trust is not for everyone, but for some individuals it can accomplish many goals in one step. We have found that many major charities have individuals (often with a job title such as “Major Gift Liaison”) willing and able to help in facilitating the use of these devices. Also, it should be noted that the job of trustee for these trusts is no sinecure. In our experience a donor is far better off using an institution experienced in such matters as trustee rather than turning to a family member or friend (which may be a perfectly adequate choice in the case of other types of trust).

– Rod Fluck

Posted in Estates / Wills, Newsletters