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Charitable Remainder Trusts
Explained
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
value would increase if the value of the trust assets increased.
If the value of the principal in the unitrust declined, the value
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.
 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.
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.
Return to Charitable Remainder
Trust story or to Real Estate
story.
Please note, individual
financial circumstances will vary. The information on this site
does not constitute legal or tax advice. Donor stories and photographs
are for purposes of illustration only. As with all tax and estate
planning, please consult your attorney or estate specialist. All
material is copyrighted and is for viewing purposes only. Use of
this site signifies your agreement with the terms
of use. The content in this Planned Giving section has been
developed for the California Symphony by Future
Focus. Please report any problems to webmaster.
Revised: May 8, 2007 14:13.
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