Charitable Remainder
Trust
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 an annuity
income or a unitrust income.
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.
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. If the value
of the principal in the unitrust declined, the
value of the interest portion of the unitrust
would decline as well. The unitrust interest
value would increase if the value of the trust
assets increased.
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.
Net 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 years'
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.
Return to Charitable
Remainder Trust story or to Real
Estate story.
Please
note, individual financial circumstances will vary. The information
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Revised:
July 10, 2008 15:50
.