Charitable Remainder TrustsWhat 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 be 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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