Charitable Remainder Trust
A Charitable Remainder Trust permits you to give an asset that has appreciated in value to tax exempt charity in an advantageous manner. If you don't have sufficient assets to set up your own Charitable Remainder Trust, there are trusts available which pool assets from various donors which provide the same benefits ("Pooled trusts").
With a Charitable Remainder Trust, you give an asset to an irrevocable trust. If the asset has appreciated in value since you obtained it, you do not pay tax on the appreciated value at the time of transfer. There may be taxes due later on the subsequent distributions from the trust.
You, your spouse and other beneficiaries receive the income for life, multiple lives, a term of up to 20 years, or a combination of each. The income could come from the purchase of a financial product such as an annuity, or from investments such as stocks and bonds which generate an income.
At the end of the term, the asset is transferred to the charity or charities of your choice. The charity doesn't have to be one that currently exists. You can give your trustee a set of guidlines to determine the proper charity, or you can specify that the funds will go to a private foundation, or what is called a "Donor Advised Fund." With a Donor Advised Fund, you or your beneficiaries can help determine the ultimate beneficiary of the funds.
Advantages to using a Charitable Remainder Trust:
- You receive an income tax deduction when you transfer the asset equal to the then value of the property minus the amount of income you are expected to receive (based on your life expectancy, interest rates and how the trust is set up).
- No capital gains tax is payable on the appreciated value at the time of transfer to the trust.
- There is no estate tax to consider because the property is no longer in your estate.
There are several types of Charitable Remainder Trusts:
- Annuity Trust (CRAT)
- Unitrust (CRUT)
- Net Income With Makeup (NIMCRUT)
- Flip CRUT
An alternative to a Charitable Remainder Trust is a Charitable Lead Trust. With a Charitable Lead Trust, the income goes to the charity, while the remainder goes to an individual.
Charitable Remainder Annuity Trust (CRAT)
- A Charitable Remainder Annuity Trust (CRAT), pays a fixed percentage of the initial value of the trust assets. There is a minimum income required to be paid to the beneficiary(ies) in the amount of 5% of the initial value of the trust assets.
- The 5% minimum must be paid out each year. If the income is less than the minimum, the difference must be maid up from the principal (the asset in the trust.)
- From the donor's point of view, there is a guaranteed income each year which will not change in periods of inflation or deflation.
- For example, if the initial asset were valued at $1,000,000, the CRAT would be required to pay $50,000 a year to the beneficiary(ies) - regardless of whether the asset has increased or decreased in value, and the amount of income generated by the asset.
- A Charitable Remainder Unitrust (CRUT) (sometimes referred to just as a "Unitrust"), pays a fixed percentage of the annual value of assets in the trust to the beneficiary(ies). For example, if the initial asset were valued at $1,000,000, and generates income of $50,000 in the year, the trust would pay out 5% of $1,050,000 or $52,500.
- Tax law requires that at least 10% of the fair market value of the net assets placed in a CRUT will remain for a charitable bequest after an estimated actuarial life expectancy of the beneficiaries is calculated, or following a term not to exceed 20 years.
- The minimum amount paid out annually must be at least 5% of the fair market value of the assets. Up to 50% may be paid out so long as at least 10% of the fair market value of the initial contrituion to a CRUT remains to go to charity.
- Additional contributions may be made to a Unitrust.
- A Unitrust generally produces higher amounts of income for the beneficiary(ies), but less of a tax deduction.
Net Income With Make-Up Charitable Remainder Trust (NIMCRUT)
- A Net Income With Makeup Charitable Remainder Trust, (NIMCRUT) requires that the income beneficiary be credited wtih the lesser of (a) an annual fixed percentage of the annual value of the trust assets or (b) the net income of the trust for that year. Any deficiencies must be made up in later years when trust income exceeds the required set percentage amounts for such years.
- The above mentioned Charitable Remainder Trusts allow for an invasion of principal to pay the beneficiary(ies). This is not allowed with a NIMCRUT. The beneficiary has to wait until there is sufficient income.
- A Flip Charitable Remainder Trust starts off as a Net Income With Makeup Charitable Remainder Trust (NIMCRUT). If there is no income, or insufficient income to pay the percentage of the annual value of the trust assets to the beneficiary, the debt is accumulated until the trust has sufficient income.
- The NIMCRUT then "flips" to a Unitrust (CRUT) and pays a guaranteed amount to the beneficiary. (See Unitrust above).
Charitable Lead Trust
- A Charitable Lead Trust can be considered to be the reverse of a Charitable Remainder Trust.
- With a Charitable Lead Trust: the donor transfers income-producing property to a trust. , The trust gives the charity a guaranteed annuity or payments equal to a percentage of the then fair market value of the trust property.
- Depending on how the trust is set up, the donor can either take a tax deduction annually for the amount that goes to charity, or an immediate income tax deduction based on the present value of the annuity or Unitrust payments. In the latter case, however, the income from the trust is included in the donor's income.
Jerry Simon Chasen, Esq.
Chasen & Associates, P.A.