Charitable Remainder Trusts

Special people deserve special recognition.

A charitable remainder trust pays (to the donor and/or another beneficiary) an amount of money for the beneficiary’s life or for a fixed term not exceeding 20 years. The remainder is then paid to a charitable beneficiary. Charitable remainder trusts offer a great deal of flexibility. Payments can be made to you for your life and then directed to your spouse or another beneficiary after your death, or the trust can be set up by your will, benefiting an heir for his or her lifetime. The eventual distribution to the foundation will take effect only at the death of the trust’s beneficiaries.

There are subtle differences between a charitable remainder annuity trust and a charitable remainder unitrust:

With an annuity trust, payments to the donor will be a fixed dollar amount each year. This amount must, according to law, equal at least 5 percent of the fair market value of the property initially placed in the trust. As a result, you can’t add to an annuity trust in future years. An annuity trust may be particularly suitable for a beneficiary who needs the security of a fixed annual income.

Charitable remainder trusts are sheltered from current income taxation because the income is distributed to beneficiaries, and the principal is held for charitable purposes. If you place low-yielding securities in the trust, the trustee can sell them, reinvest the proceeds in issues paying higher yields, and neither the trust nor you will have to pay any tax on the capital gains that are realized at that time.

The beneficiary of the trust will pay federal income tax on amounts distributed by the trust. Income you receive retains its character from the trust. For example, if the trust received both ordinary income and capital gains, your distribution is deemed to come first from the ordinary income, while any excess is deemed to be from capital gain income. Depending upon the amount of the payments to you and the amount of the trust’s income, there may be no tax on the capital gains attributable to the sale of the appreciated securities.

With both annuity trusts and unitrusts, there are a number of benefits, including greater spendable income. You receive an immediate federal income tax deduction for the year the charitable remainder trust is established, subject to the then-prevailing percentage limitations on charitable gifts. The amount of the deduction will be determined by U.S. Treasury Department tables, which take into consideration the following:

  • Whether it is a unitrust or an annuity trust
  • The amount or percentage to be paid out each year
  • The number of persons to whom the payments would be made
  • The age of the persons receiving the payments

Once you set up a charitable remainder trust with the foundation as the remainderman, the property is no longer part of your estate, and your heirs will not benefit from the property. Life insurance can replace the value of an asset that has been donated to charity. You can use the tax savings resulting from the charitable deduction to buy a life insurance policy and pay the subsequent premiums. Ideally, the value of the life insurance policy is equal to the value of the contributed asset. Placing the insurance policy in a separate trust permits the proceeds to pass outside your taxable estate to your heirs. This arrangement, sometimes called wealth replacement, is useful in securing the interests of family beneficiaries. In combination with a method of charitable giving, wealth replacement can be a powerful estate-planning tool.