The charitable remainder trust is sometimes called the "Swiss Army knife" of planned giving, because it is so versatile. Compared to the simpler Gift Annuity and Personal Income Fund, it offers much more flexibility in terms of funding, payment rates, payment schedules, and the number of beneficiaries.
Cash, securities, and even property such as real estate or art can be used to fund a charitable remainder trust. Each year, for the duration of the life or lives of one or more income beneficiaries, or for a term of up to 20 years, a charitable remainder trust pays out at least 5% of the market value of the trust. Charitable remainder trusts can have any number of charitable beneficiaries.
The rate of charitable remainder trust income is determined in advance. In an “annuity trust,” payments are of equal and fixed dollar amounts. In a “unitrust,” an annual percentage rate is specified, and the dollar amount paid fluctuates with the value of the trust’s assets. There are several types of unitrusts, including the “net income unitrust” which allows the trust to be funded with illiquid property such as real estate, but makes payments only when the trust has cash earnings. Net income unitrusts can also be invested initially for less income and higher capital gains, and the investments later shifted toward higher income-producing investments, which can be useful if higher retirement income is a priority. If a charitable remainder trust is funded with cash, then the trust can invest in tax-exempt securities and the income can be tax-free.
Not surprisingly, this flexibility and power comes at a somewhat higher cost. A trust agreement, prepared in compliance with IRS mandates and approved by the donor’s attorney , is required in order to create a charitable remainder trust. In some circumstances, an appraisal of the donated property is also required.
What can a charitable remainder trust be funded with?
Cash or property, even relatively illiquid property such as real estate, closely held stock, or personal property.
How long can a charitable remainder trust pay income?
For the live(s) of the income beneficiaries, or for a term of up to twenty years. Term-of-years trusts can be useful for providing income for a predetermined period even if the income recipients are so young that a trust for their lives might not qualify for deductibility. This makes it a potentially useful way to first provide for the education of children or grandchildren, then benefit Davidson.
How many income beneficiaries can a charitable remainder trust have?
Any number of people. Certain types of trusts can also be income beneficiaries. Pets cannot be income beneficiaries!
How many charitable beneficiaries can a charitable remainder trust have?
How much income can a charitable remainder trust pay?
The statutory minimum is 5%. There is no maximum, though the rate (when calculated with the ages of the beneficiaries and/or the term of the trust) must be low enough that the charitable beneficiaries are guaranteed to receive a remainder of at least 10% of the amount originally donated. Choosing a higher income payment results in a lower tax deduction, however, as well as making it less likely that the principal of the trust will grow to provide more future income.
How is the amount of a charitable remainder trust income determined?
In advance; if the trust is a “unitrust” an annual percentage rate is specified, though the dollar amount actually paid year by year fluctuates with the value of the trust’s assets. If the trust is an “annuity trust” payments are of equal and fixed annual dollar amounts every year. Either way, the trust payout cannot be changed once the trust is established.
How often is (or can) charitable remainder trust income be paid?
Usually quarterly, though a donor can specify a different schedule.
When does a charitable remainder trust have to begin paying income?
At a date specified when the gift is made. Using a “net income” unitrust allows the trust to begin making payments only when it receives cash; if illiquid property is used to fund the trust this is a practical necessity, but a “net income” unitrust can also be invested initially for capital gains, and the investments shifted toward higher income-producing investments if and when the donor needs more income.
How is the income from a charitable remainder trust taxed?
Almost always as ordinary income. If the trust is funded with cash, then the trust can invest in tax-exempt securities and the income can be tax free.
What formalities and documents are required to create a charitable remainder trust?
A trust agreement, prepared or reviewed by the donor’s attorney, and sometimes an appraisal of the donated property.
How are the assets in a charitable remainder trust administered and invested?
If Davidson is trustee, in a mix of dividend-paying stocks and bonds of varying duration, under Davidson's life income gift management arrangement with State Street Global Advisors; otherwise by the donor (if the donor serves as trustee), and/or by an outside money manager such as a bank trust department. Trust assets are rarely “pooled” with other trusts’ assets, and assets in an individual trust can be invested in assets which are inappropriate for other types of life income gifts.