Charitable Remainder Trusts

This article was provided through the courtesy of Citizens Bank.

Henry David Thoreau, noted philosopher, naturalist and author was once quoted as encouraging an individual who had spoken of tithing to “spend the nine tenths so, and done with it.” A noble thought though not especially practical for those living in life framed by the complications of the twenty-first century.

While many of us may have dreams of a large gift we would like to make to charity, relatively few can do so without taking into consideration the practicalities demanded by our world: a need to supplement retirement income, a desire to care for an elderly parent or sibling, a promise to provide educational funds for children or grandchildren. There are many and competing needs for limited dollars.

For those who have dreams that speak to supporting charity but recognize the need to address financial security first there are the unique options provided by charitable remainder trusts.

Charitable remainder trusts were created more than three decades ago to encourage philanthropy while providing for the needs that might stand in the way of the gift that an individual might otherwise wish to make.

Relatively straightforward, a charitable remainder trust hold assets, paying a beneficiary or beneficiaries income for a stated period of time. At the conclusion of that period, which may be for life or for a term of years (not to exceed twenty) the remaining assets are released to the charity for whatever use the donor originally stipulated.

Remainder trusts may take one of two basic forms, the unitrust or the annuity trust.

A charitable remainder unitrust provides income to the beneficiary as a fixed percentage of the annual valuation of the trust’s assets. This payout may be no less than 5% by law. Actual payments will fluctuate annually as the value of the trust’s assets fluctuates.

In contrast, a charitable remainder annuity trust provides income to the beneficiary in the form of a fixed payment. The payment must equal or exceed 5% of the original value of the assets contributed and will not vary—even as the assets may grow or diminish.

Numerous benefits accrue to those individuals creating such trusts, contributing to their growing popularity. Normally upon the sale of appreciated property donors are liable for taxes equal to 20% of the gain. Not so with charitable remainder trusts. Because the trust is, by definition, tax exempt it pays no taxes when it sells the property; the entire sum is available for re-investment. One can understand why these are especially popular with individuals who may wish to diversify their holding to take advantage of other investment opportunities, but who have avoided doing so because of tax liabilities.

These trusts can be used in a variety of ways to address the range of concerns that an individual may have – often taking a low-yield, appreciated asset and converting to something far more productive to meeting family objectives. They have been used to supplement retirement income, to provide an alternative source of income for tuition, even to convert assets economically to provide for care in continuing care retirement communities.

Finally, individuals who create charitable reminder trusts are entitled to claim a substantial deduction for a portion of the value of their gift. The exact deduction will vary as a function of the age of the beneficiaries and the payout rate. A general rule of thumb to remember is the older the beneficiaries, the larger the tax deduction; the higher the payout rate, the lower the tax deduction.

For added flexibility in planning charitable remainder trusts can be created either during the lifetime of the donor (inter vivos) or under the terms of a will (testamentary) for additional flexibility.

If you have any interest in learning more about charitable remainder trusts you will want to speak with your tax professional. You should know, also, that many charities have retained staff and counsel to assist with these planned giving opportunities. They often can provide you and your advisors with sample language, deduction calculations, income projections and other services and serve as a great starting point.

Deborah Blackmore Abrams © 2002
Deborah Blackmore Abrams is not affiliated with Citizens Bank. The opinions and information provided by Deborah Blackmore Abrams in this article may not be the opinion of Citizens Bank.