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Charitable Remainder Trust

A Charitable Remainder Trust (CRT) is an irrevocable trust set up by the donor, which provides income for life (or a period of years) to the donor, a bypass of capital gains tax as well as an income tax charitable deduction when the trust is established. At the termination of the trust, the remaining assets are paid to the specified charitable organization, such as SOHO.

There are two basic types of CRTs: (1) Unitrusts, which pay income based upon a selected percentage (5% minimum) of the assets of the trust valued annually; and, (2) Annuity Trusts, which pay income in an amount stated when the trust is created (5% minimum of initial value of assets in trust) and never varies. A CRT is appropriate for planning larger amounts of assets.

Trusts play a central role in estate planning and can be adapted to almost any family situation. In general, trusts are legal agreements where something of value is held by one party (the trustee) for the benefit of another (the beneficiary). The trustee manages the trust property so that it produces income which is distributed to the beneficiary. When the trust comes to an end, usually at the beneficiary's death, the assets remaining in trust pass to a "remainderman".

In the charitable remainder trust (CRT) a donor places an asset in trust and receives an income, an income tax charitable deduction, and a bypass of capital gains. At the termination of the trust the assets benefit a charity. Because the charity (remainderman) ultimately receives the assets, the donor receives an income tax charitable deduction for part of the value of the assets placed in trust. The amount of the deduction depends upon the age of the donor, the agreed upon payout rate and the current IRS tables in use at the time the trust was formed.

The length of the CRT can be for the life or lives of persons living when the trust was created, a term of years (not more than 20), or a combination of the two.

There are two types of CRTs:

  1. Charitable Remainder Annuity Trust
    The annual income is a fixed dollar amount which must be at least 5% of the fair market value of the trust assets at the time the trust is established. The trustee is authorized to dip into the trust principal if necessary to fulfill the payout obligation.
  2. Charitable Remainder Unitrust
    The annual income is a fixed percentage (at least 5%) of the trust's value each year-therefore, the payment will fluctuate. There are three types of unitrusts:
      A. Basic
      Trustee may invade principal if there is insufficient trust income to meet the required percentage payment.
      B. Net Income
      The beneficiary receives the lesser of the stated percentage payment or the net income earned by the trust.
      C. Net Income With Make-up
      If the trust earns less than the agreed upon percentage, only the net income is paid to the beneficiary. If in succeeding years the trust earns more than the prescribed percentage, the trust will make up prior payments.

A CRT may be funded with cash, securities or real estate which is debt free. When the trust is funded with an appreciated asset, the donor avoids paying the capital gains tax which would have applied if he had sold the asset outright. Many donors choose to use part of their tax savings to purchase life insurance making heirs the beneficiaries. This replaces the wealth that was given away.

Illustration
George and Sue Schmidt are 55 and 54. Twenty years ago the Schmidts purchased securities for $100,000. Today those are worth $500,000 and return dividends at 2%. The Schmidts are very interested in supporting SOHO. Mr. and Mrs. Schmidt choose to create a charitable remainder unitrust, funding it with those securities. The Schmidts increase their income, now receiving 6% of the value of the stock ($30,000). They also qualify for an income tax charitable deduction of $94,9400, which may save $29,419 in taxes, and they bypass the capital gains tax on $400,000, which save $112,000. After the lifetimes of George and Sue the assets pass to SOHO.

As George and Sue are about to fund their CRT, they remember that their estate plan has not made provision for their son, John. They decide to also create an insurance trust, divert to it half of the income they receive from their CRT for 8 years, and, with those contributions, allow the insurance trust to purchase an insurance policy that names John as the beneficiary. In addition to receiving all the same tax benefits which flow from the creation of the CRT, George and Sue have provided for their son John, who will receive the insurance proceeds free of the estate taxes. Assuming that the value of the assets in the insurance trust increases annually, John will receive that appreciation tax-free.

For more information - contact Bruce Coons, Executive Director
Bruce.Coons@SOHOsandiego.org

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