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Charitable Remainder Trusts
What are they? A charitable remainder trust
allows you to make a donation to your favorite charity, and receive the
income from the donated assets for your personal use during your lifetime.
After death the balance of the trust is donated to the charity.
How do they work? The donors establish the
trust and transfer assets, such as real estate or highly appreciated stocks,
to the trust. The trustees of the trust, who are often also the donors of
the property, then sell the assets for the trust and reinvest the proceeds.
The donors receive a specified amount of the income from the trust either
for the balance of their lives, or for a fixed period of time. After their
deaths, the assets are given to the charitable organization named in the
trust.
What are the advantages?
1. The donors receive an income tax deduction for the donated assets.
2. Capital gains taxes are avoided on the assets that are donated.
3. The assets that are donated are no longer part of the donors'
estate, and will not be subject to the federal estate tax.
4. The donors will receive income from the assets based on a
percentage or amount specified in the trust.
5. The donors can decide which charities will benefit from their
estate, instead of giving a substantial part of their estate to the
federal government.
What are the disadvantages?
1. The charitable remainder trust must be irrevocable.
2. The part of the estate that is donated to the trust will not go to
the donors' heirs, but instead will eventually wind up being given to the
charitable organization.
3. If the assets donated were substantial, the donors may not be able
to take the full amount of the charitable deduction on their income tax
returns in the same year that the donation took place. However, the
deduction can often be spread over a five-year period.
Types of charitable remainder trusts include the
following:
1. Charitable Remainder Annuity Trust: An
annuity trust provides a fixed amount of income each year to the donors.
If the donors decide to receive $50,000 per year from the trust, for
example, they will receive that amount even in years in which the trust
does not earn $50,000 from its investments. In other words, if the income
is not enough, the payments to the donors will be taken out of the
principal of the trust. The amount chosen must be at least 5 percent of
the initial value of the trust, and cannot exceed 50 percent. The value of
the remainder amount that will go to the charity must be at least 10
percent of the initial value of the trust.
2. Charitable Remainder Unitrust: A
unitrust provides an income that is a fixed percentage of the assets. The
value of the assets are recalculated each year to determine the amount
that will be paid. The amount of the payments will vary each year, and the
donors will have some protection against inflation. The percentage chosen
must be between 5 and 50 percent of the trust principal, and the value of
the remainder amount that will go to the charity must be at least 10
percent of the initial value of the trust.
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