Why is the charitable remainder trust called a remainder trust?
It has two types of beneficiaries, the charity and the so called non-charitable beneficiaries, usually the grantor of the trust and the grantor’s spouse. The non-charitable beneficiaries receive trust payouts at least annually during their lives or for a number of years. The remainder of the assets at the end of the trust term then goes to the charity.
When may a charitable remainder remainder trust (CRT) be a good idea?
CRT’s can be used to spread income taxes over the duration of the trust. For example, consider an individual who owns three stocks that have highly appreciated in value. If she wanted to diversify into a broad portfolio, she would have to sell the stocks first, incur capital gains taxes, and then reinvest with the reduced proceeds. By transferring the three stocks into the CRT and then diversifying inside the CRT she will be able to spread income taxes over the life of the CRT. This is because income taxes come only due for the periodic payouts to the non-charitable beneficiaries. By avoiding an immediate tax bill for capital gains, the money in the diversified portfolio is allowed to grow from a higher base. This benefits the non-charitable beneficiaries and the charity. See also here.
What is a Unitrust?
A Unitrust provides that the income beneficiary instead of receiving the income from the trust, receives a set percentage of the net asset value (NAV) of the trust determined annually and usually paid monthly. A commonly used percentage is 4%.
What types of charitable remainder trust are there?
There are two types of charitable remainder trusts called a charitable remainder annuity trust (CRAT) and a charitable remainder Unitrust (CRUT). Generally, for either type of trust the remainder interest must be at least 10% of the fair market value of the assets transferred to the trust.
What is a CRAT and how does it work?
A CRAT is a charitable remainder annuity trust. A fixed percentage or dollar payment is paid to the annuitant at least annually. This fixed payment is based on the initial market value of the trust property. Annual distributions must be between 5% and 50% of this initial fair market value of the trust property. The payment maybe for either the lifetime of the beneficiaries or a period not to exceed 20 years. The payment may not increase or decrease during the term of the trust, nor may additional gifts be made to the trust. Following the death of the annuitant, the remainder is then transferred to the charity or is held in trust and distributed to the charity.
What is a CRUT and how does it work?
The CRUT (charitable remainder unitrust) has the same requirements as the annuity trust (CRAT), except the annual payment is a fixed percentage of the trust property than existing. Because the trust property will fluctuate depending on investment returns and withdrawals, the annual payment must be recalculated each year upon reevaluation of the trust property. Thus, the annual payment will increase or decrease, depending on the value of the trust assets. A limited exception allows the unitrust to pay the lesser of 5% or trust income. The CRUT also permits additional gifts to the trust. A typical CRUT would pay out 5% of fair market value of the trust determined on December 31st of the prior year, payable in 12 monthly installments.
What are the tax benefits of charitable remainder trusts?
Both CRAT and CRUT provide income and estate tax benefits to the individual who wants to give to charity. The value of the charity’s remainder interest is a deductible charitable contribution on the donor’s individual income tax return for the year in which the asset is transferred to the trust. Any unused deduction can be carried forward for five years.
Also, the value of the charitable gift is based on the fair market value of the remainder interest at the time of the gift. That means that any appreciation is part of the gift and is not subject to income tax and the individual is allowed a deduction for the value of the remainder interest, including the untaxed appreciation.
If a charitable remainder trust is established by the individual’s will, it will generate an estate tax deduction for the remainder interest.
See also: Tax advantages of making charitable contributions with IRD (Income in Respect to a Decedent)
Charitable Giving: Private Family Foundations and their Alternatives
