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Charitable Remainder Trusts Explained
Goal: Diversify holdings, avoid capital gains
Benefit: Potential increased income and tax benefits
A Charitable Remainder Trust is established for the life of the donor (also trustor or grantor) and/or for the life of any beneficiary(-ies) and is irrevocable. While there are certain changes that may be made, once the trust is established, it cannot be revoked. If it is desired, the income period of the trust can be established for a specified period of time not to exceed twenty years. The twenty-year maximum does not apply if the trust life is based on the life expectancy of the income beneficiary(-ies).
Because the income is paid to one or more parties and, at the end of the trust's life, the principal and any undistributed interest is paid to a different party, a charitable remainder trust is called a split interest trust. The income portion of the trust may be either a unitrust income or an annuity income.
With a unitrust, the assets of the trust are revalued annually. The percentage rate established when the trust agreement was signed determines multiplied times the value of the trust each year determines that year's annual payout. The payout amount would increase if the value of the trust assets increased. If the value of the principal in the unitrust declined, the amount of the interest portion of the unitrust would decline as well.
The income from an annuity trust is calculated at the time the trust is established using the interest rate and the initial market value of the assets in the trust. The trust is not revalued in the future. If the assets of the trust go up or drop in value, the income portion does not change. Principal may be used if the income is not sufficient to pay the required annual payment. The amount of income does not change in the future unless the principal is exhausted.
A charitable remainder trust is an attractive planning tool for the disposal of highly appreciated assets. While the assets revert to the charity rather than the heirs of the estate, the use of an irrevocable life insurance trust in conjunction with a charitable remainder trust could replace the asset's value for the heirs. Another option is to provide income to the heirs for a term of years after the initial income beneficiaries have died. There are potential gift tax issues in this option and lengthening the life of the CRT will generally reduce the charitable tax deduction.
For more information or a confidential discussion of your charitable options, please email or call our legacy giving specialist and St. Michael's parishioner, Richard Lamport, at 505-508-1066. Please see our contact page for more information about Dick.