Charitable Remainder Trusts

Charitable Remainder Trusts

In the right time and place, a charitable remainder trust is an incredibly effective estate planning tool. Let's say you own an asset that has appreciated considerably in value since its acquisition. For instance, years ago you purchased stock for $1000. Today it is worth $600,000 (true story). Annual dividends are only 2% or $12,000. You don't want to sell because you would have to pay capital gains tax and lose almost a third off the top. You gift $500,000 of the stock to a charitable remainder trust which is a non-taxable transfer, keeping $100,000 to sell personally or to be allowed to grow. The trust sells its stock for $500,000 and invests the money in annuities which pay 8.5%. Now the trust pays you and your spouse $42,500 per year (up from $12,000) and you buy replacement insurance (a $500,000 joint and survivor policy) for an annual premium of (approximately) $3500 so that when the survivor of you and your spouse dies, the estate is reimbursed the $500,000. Because there are things you wish to do with the $100,000, you did not include it in the trust. You sell the stock and the capital gains tax is more than offset by the tax credit for the gift to charity so you effectively sold the stock tax-free. (Watch out for alternative minimum tax!)

  1. Charitable Remainder Annuity Trust (CRAT). An annuity trust pays a fixed percentage of the initial amount contributed to the trust. For instance, in the example above, the trust would pay $42,500 per year whether or not the trust actually had that much income. Also, if the trust had an income greater than $42,500 in a given year, it would pay no more than $42,500 per year. Whatever remains in the trust at the death of the surviving spouse goes to the remainderman beneficiary(ies) i.e., the charity(ies) whether it is more or less than the original $500,000. One negative of a CRAT is that once it is funded, you cannot add to it. If you wanted to do the same thing with another appreciated asset, you would need to set up a new trust.

  2. Charitable Remainder Unitrust (CRUT). A unitrust pays a percentage of the initial assets revalued annually, providing a better hedge against inflation than the annuity trust. The unitrust need not pay out more than it earns. For instance, if you set the percentage return at 8.5% and the trust only earns 7.0%, you could have the trust pay you only 7% that year and make up the difference in a year in which the trust exceeded 8.5%.

  3. Net Income with Makeup Charitable Remainder Unitrusts. It is possible to build some flexibility into a unitrust through the use of certain commercial deferred annuities and careful document drafting. If income beneficiaries do not need all of the income immediately from the trust, they can defer taking some or all of the income in that year without recognizing income in that year. Then, in a year in which they need the income i.e., after retirement or in a year when they know they are going to have exceptional outgo, they can withdraw the money.

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