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Planning Your Future: Charitable Remainder Trusts
January 13, 2010
In the past, charitable remainder trusts have been a popular estate planning tool. However, during this economic downturn, with the decline in the asset value of investment accounts, interest in this planning vehicle has declined. With the current trend of growth in investments, interest is once again renewed.
A charitable remainder trust works like this:
- The trust is established and is funded with cash or investments.
- The designated beneficiary of the trust will receive income for the duration of the trust.
- At the termination of the trust, a designated charity receives the "remainder interest."
In the year that the trust is funded, a charitable contribution deduction is available against income taxes for the present value of the "remainder interest" amount expected to go to the charity. This remainder interest is not subject to gift tax. The funding of the trust also saves some future estate tax since the donated assets will not be included in the donor's estate value. Additionally, if the trust is funded with highly appreciated assets, the donor would not pay the capital gains tax that would be incurred if the stock was sold outright. Rather, the trust could later sell the stock and pass out the gain as part of the income stream. This could defer some of the tax due to later years.
There are two types of Charitable Remainder Trusts - the main difference is the method of calculating the income stream out to the income beneficiary of the trust. First, for the Charitable Remainder Unitrust, the unitrust payments are calculated as a fixed percentage of the trust's assets as measured on a specific date each year - therefore, the annual payment will fluctuate with the fair market value of the assets in the trust. Alternatively, the payments for a Charitable Remainder Annuity Trust are fixed for the duration of the trust and are calculated as a percentage of the initial fair market value of the assets contributed to the trust. In each type of trust, the percentages noted above must be at least 5%.
The trust beneficiary receives the trust payments as income subject to various tax rates, depending on the type of income passed through from the trust (e.g. ordinary, capital gains, etc.) as determined by special ordering rules per IRS regulations. If the named beneficiary is a person other than the donor or the donor's spouse, the present value of the income stream will be subject to gift tax as well if the amount exceeds the annual gifting exclusion and any remaining unified credit amount.
It must be noted that not just any trust will do - there are many IRS requirements that must be satisfied for the trust to qualify for the beneficial treatment discussed here. Please contact your advisor here at the 415 Group to determine if this planning vehicle is right for you.
