Frequently
Asked Questions
 If
a trust agreement is established as irrevocable, it means that it can't be revoked
(broken) except under unusual circumstances. Why would anyone want an irrevocable
trust?
There are always specific reasons for making an irrevocable
trust agreement. Perhaps it involves a family business where some of the family
members are getting on in years and the family wants to make certain that management
continues to run smoothly even if hindrances, such as senility, enter the picture.
Many times the reasons for an irrevocable trust involve estate and/or income
tax avoidance. In order to be successful in such avoidance, the trustor must not
have any direct or indirect power or control over the trust property or income.
The Internal Revenue Code and the accompanying Regulations should be carefully followed when considering irrevocable trusts.
What
happens to my assets in a trust for a charity if the charity goes out of business
before the expiration of the trust?
Your trustee is authorized to
name a substitute, if that is the sole charity.
Can
I use my insurance to benefit charitable organizations?
Yes. This is an area overlooked by many. You can
name one or more charities as alternate or as primary
beneficiary. Furthermore, if you no longer need the policy
proceeds in your estate for use now, you can transfer
ownership of the policy to the charity or charities. If
the policy has cash loan value, the charity can draw this
out and use it. In this case, you not only receive a charitable
gift deduction, but any additional premiums you pay are
tax deductible for you now. And, on your death, the charity
receives the balance of the policy proceeds and none of
it is included in your estate for tax purposes.
Should
I name a charity as trustee of my charitable remainder trust?
This
is often done if the organization is qualified to so act under local law. The
organization's representatives can satisfy you in that regard. Often they will
serve without fee, which is an additional incentive.
How
can I fund a charitable remainder trust and how is my income calculated?
The usual funding sources for a charitable remainder trust are cash and
marketable securities. Real estate and other marketable assets may also be used,
though not all charities accept real property such as real estate. Generally,
the charity will convert the assets to cash to fund the trust. Each charitable
organization will establish what assets it will accept, as there are often time
and conversion expenses to assets other than cash and marketable securities.
The income from the trust is based on an annual percentage of the value of the
trust. The percentage must be at least 5% (but may be more) of the fair market
value of the trust assets. Note the valuation difference in the next question
between an annuity trust and a unitrust.
Federal and state income tax deductions
are available in the tax year the trust is created. The deductions are based on
the age of the donor and the amount (value) placed in the trust. Please check
with your tax advisor or development officer concerning the calculation of the
deduction.
If the trust is funded with cash, an amount up to 50% of the donor's
adjusted gross income in the tax year the trust was established is tax deductible.
If appreciated assets such as securities or real estate are used, the percentage
of gross income that is deductible is up to 30%. If the value of the trust exceeds
the percentage limits of adjustable gross income, the excess may be carried over
after the tax year the trust was established and used as deductions in subsequent
years (not more than five additional years).
What
is the difference between a charitable remainder unitrust and a charitable remainder
annuity trust?
The major difference is in the valuation of the assets
of the trust, which establishes part of the calculation for the determination
of the amount of income received by the income beneficiary(-ies). The annuity
assets are valued at the time the assets are placed in the trust. The trust assets
are never revalued. Annual payments remain the same, whether the assets appreciate
(increase in value) or depreciate (lose value).
The assets in the unitrust
are revalued annually. If the trust assets appreciate, the payment to the income
beneficiary(-ies) will increase. If the trust assets depreciate, the payment will
decrease.
Please
note, individual financial circumstances will vary. The information
on this site does not constitute legal or tax advice. 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. This Planned Giving section has been developed for
WFAE 90.7fm by Future
Focus. Please report any problems to webmaster.
Revised: September 14, 2010 13:00 .
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