What is a Charitable Remainder Trust?

A charitable remainder trust is an irrevocable trust that allows the settlor/taxpayer to donate property, cash, securities, or other assets to charity and still receive an income stream for life. The trust pays income to the settlor or other beneficiaries for life or for a specific term of up to 20 years, then the remainder of the trust passes to one or more qualified U.S. charitable organizations.

The advantages for the taxpayer in creating a charitable remainder trust include:

• Helping the taxpayer to plan donations to charities that he or she supports;
• Providing a stable income to the taxpayer or other non-charitable beneficiaries for life or other specific time period;
• Allowing the taxpayer to defer income taxes on the sale of assets transferred to the trust;
• Possibly allowing the taxpayer to take a partial charitable deduction based on the value of the charitable interest in the trust.

Distributions to a non-charitable beneficiary from a charitable remainder trust are taxable to the beneficiary and must be reported on Schedule K-1 of the Form 1041. The charitable remainder trust’s investment income is exempt from tax.

The charitable deduction allowed for contributions to a charitable remainder trust is limited to the present value of the remainder interest of the charitable organization. This is calculated as the value of the donated property less the present value of the annuity.

There are two types of charitable remainder trusts, based on how the beneficiaries are paid. A charitable remainder annuity trust (CRAT) pays a specific dollar amount each year to the non-charitable beneficiaries. The amount must be at least 5% but no more than 50% of the fair market value of the trust, valued annually. A charitable remainder unitrust (CRUT) distributes a percentage of the value of the trust each year to the non-charitable beneficiaries. Again the amount must be at least 5% but no more than 50% of the value of the trust, valued annually.

For more information on charitable remainder trusts and other charitable giving vehicles, please contact your estate planning attorneys.