Charitable Remainder Trusts
Charitable Remainder Trust
A charitable remainder trust is a separately managed trust that can be tailored to accommodate a wide variety of gift assets and to meet your personal financial and philanthropic goals.
Charitable remainder trusts may offer you a number of important benefits:
. An income tax charitable deduction
. Increased spendable income
. No capital gains tax when appreciated property is transferred to the trust
. Reduction of your taxable estate
. Provides for the longterm support of the ACLU
To establish a charitable remainder trust (CRT), you make an irrevocable contribution of cash, securities, or other property to a trustee of your choice and designate a person or persons who will receive income. The trust assets are separately invested and individually managed. The trustee can be any person, institution or group that you choose. The beneficiaries designated by you may receive the income generated by the trust for a term not to exceed twenty years or for life. When the specified time of payments has concluded, the appointed trustee pays the principal to the ACLU Foundation. Because there are administrative and start-up costs associated with a CRT, it generally makes sense to establish a trust with a contribution of $100,000 or more. When you establish a CRT, you determine the annual income paid by the trustee by selecting a percentage payout, which must be at least 5%. There are two main types of CRTs: a charitable remainder unitrust and a charitable remainder annuity trust.
Charitable Remainder Unitrust
A unitrust provides a fluctuating annual payment based on a percentage of the trust’s assets as revalued each year. If the unitrust’s assets grow over time, the beneficiaries will receive a larger annual payment. (If they shrink, the payments decrease.) The standard unitrust agreement can be further structured to enhance income in future years rather than immediately.
George and Mary R., ages 67 and 65, are longtime ACLU members who share a lifelong commitment to civil rights that began when they participated in the historic March on Washington in 1963. On the verge of retirement, George and Mary are reviewing their portfolios to accommodate their new lifestyle. Many years ago, they purchased stock for $5/share. It is now selling for $75/share with an annual yield of 1.5%. They would like to sell the stock, but feel “locked-in” because of the potential capital gains tax on the appreciation. After speaking with the ACLU and their financial advisor, George and Mary decide to give 3,000 shares worth $225,000 to the ACLU Foundation for a charitable remainder unitrust. The trust will pay 5% to them jointly and then to the survivor. The immediate effect of George and Mary’s gift is that they earn 5% a year on an asset that previously earned less than a third of that amount. As the principal grows, so will the annual payments to George and Mary. They are also entitled to a charitable deduction equal to $83,149. Because they donated long-term appreciated property, George and Mary may claim this deduction in an amount up to 30% of their adjusted gross income in the year they make the gift; the excess may be carried forward for five additional years. In addition, George and Mary completely avoid capital gains tax when the stock is transferred to the trust. Most importantly, they have the satisfaction of knowing that the trust principal will ultimately be used to carry on their vision of equal protection for all.
Charitable Remainder Annuity Trust
An annuity trust pays a fixed dollar amount each year, regardless of how the economy performs. The annuity trust provides the donor with the most secure income, as each payment is always the same.
Elizabeth C., a 78-year-old retired public school teacher, joined the ACLU after she temporarily lost her job for refusing to sign a loyalty oath. She wants to make a significant gift to help the ACLU continue its vigorous protection of individuals against unconstitutional governmental acts, but worries about parting with the retirement income her investments provide. In a conversation with staff from the ACLU, Elizabeth realizes she can use $150,000 in Treasury notes that will be coming due shortly to fund a charitable remainder annuity trust. The trust will pay her a $7,500 annuity (5% of $150,000) for the rest of her life. Moreover, the ACLU Foundation, as trustee, will invest the trust assets in tax exempt municipal bonds, so that on a tax adjusted basis, Elizabeth will actually receive more net spendable income from her annuity trust than she had received from the Treasury notes. Additionally, she is entitled to an income tax charitable deduction equal to $94,068. Because Elizabeth donated cash, she may claim this deduction in an amount up to 50% of her adjusted gross income in the year of the gift; she may carry forward any unused deduction for five additional years.
Income Tax Benefits
When you make a gift to establish a CRT, you are entitled to an immediate income tax charitable deduction for a portion of the value of the donated assets. The size of the deduction is based on the projected value of the ultimate gift to the ACLU Foundation from the trust. This is calculated by an IRS-prescribed formula, taking into account the age and number of income beneficiaries (or number of years, if a term-of-years trust), the annual payout, a federal discount rate, and the type of CRT you select. Under IRS regulations, a charity’s remainder interest must be at least 10% of the assets placed in trust. Generally, the older the beneficiary or the shorter the term and the lower the rate of payout, the larger the charitable deduction.