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CHARITABLE
REMAINDER TRUSTS
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.
Once established, it cannot be changed. 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.
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