Many
donors today are seeking ways to increase the annual income they receive
from their securities and cash balances. Like
Charitable Gift
Annuities discussed elsewhere, Charitable Remainder Trusts (CRTs)
provide the potential to increase annual cash flow from investment assets,
while deferring capital gain taxes, generating a charitable income tax
deduction, avoiding estate taxes and eliminating money management concerns.
Charitable Remainder Trusts involve the creation of a separate legal entity,
the trust, which is funded by an irrevocable transfer of cash or certain
other assets. The trustee of a CRT receives the gift assets, invests them,
makes at least annual distributions to the income beneficiary(ies), files
necessary reports and tax returns and, upon the death of the income
beneficiaries, distributes any remaining trust assets to the charity or
charities named in the trust document as remainder beneficiaries.
There are two main types of CRTs:
annuity trusts,
in which you establish the annual
payment amount
at the creation of the trust, with
payments remaining fixed
for the life of the trust; and
unitrusts,
in which you establish the
payment percentage
at the creation of the trust, with
payments varying each
year based on
the value of the trusts assets each year on the annual valuation date,
typically January 1.
CRTs
can be funded with cash, appreciated securities or certain other assets.
Since CRTs are tax-exempt, appreciated assets transferred to the trust can
then be sold without creating an immediately taxable capital gain. That
means that 100 percent of the trust assets can be reinvested to generate
income and appreciation. The donor defines the annual trust distribution
amount (annuity trust) or percentage (unitrust) at the outset of the trust.
Annual trust payments typically range from five to nine percent. The
taxation of the trust payments to the income beneficiary depends on the
character of the income earned by the trust (ordinary, capital gain,
tax-free or return of capital).
In
the year the trust is funded, the donor receives a charitable income tax
deduction for a portion of the fair market value of the assets contributed
to the trust. The deduction is not 100 percent of the value because the
donor or other designated beneficiary will receive payments from the trust.
The amount of the deduction varies with the number and ages of the income
beneficiary(ies) as well as the trust payment rate and interest rates when
the trust is funded.
Assets in a CRT are no longer part of your estate and avoid any estate taxes
that may otherwise be due upon your death. Finally, CRTs eliminate your
money management concerns since the trustee of the trust, selected by the
donor, is responsible for managing the money.
Benefits of a Charitable Remainder Trust
A 70-year-old donor with
common stock that originally cost $30,000, currently worth $200,000 and
paying an annual dividend of $2,000 (one percent), could establish a
seven-percent charitable remainder unitrust, naming himself as income
beneficiary for life and Haven Of Rest Ministries as remainder beneficiary.
In addition to helping assure the future of the Mission's emergency shelter,
residential addition recovery and transitional housing programs, the trust
would provide the donor with:
