Goal: Diversify holdings, avoid capital gains, add flexibility for hard-to-sell assets
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 and the percentage rate established in the trust agreement determines the dollar amount of the unitrust interest. The unitrust interest 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.
An annuity income is calculated at the time the trust is established in the trust agreement. It is a fixed amount of dollars based on the then market value of the trust. If the assets of the trust go up in value, the income portion does not change.
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.
Income Charitable Remainder Trust
This variation of a unitrust provides that either the specified fixed percentage of the trust assets or the net income of the trust is distributed to the beneficiary, whichever is less. This type of trust is often used to handle real estate as there is no fixed distribution requirement, giving the trustee time to arrange an orderly sale of the property. A net income charitable remainder unitrust can be an excellent way to donate appreciated property and turn it into an income stream as well as acquire tax benefits.
A donor may also add a 'makeup provision" to the trust. This allows a trust to distribute more than the fixed percentage of the assets in years where the trust's income exceeded the fixed percentage. In this manner, previous year's shortages, when the trust was not able to earn the fixed percentage payment, may be made up.
Flip Charitable Remainder Unitrust
A flip unitrust blends two types of trusts for greater flexibility, both for the donor and the eventual remainderman. The trust functions as a net income trust until a specified event occurs. On January 1st following the specified event, the net income trust flips and becomes a standard unitrust. This type of trust functions well for illiquid assets such as real estate or assets that are hard to value. Click here for more information on flip unitrusts.