9.5 Charitable Remainder Trusts

• Library: A Lawyer's Guide to Estate Planning: Fundamentals for the Legal Practitioner (ABA) (2018 Ed.)

9.5 Charitable Remainder Trusts

One of the better estate-planning techniques for an individual who is at least somewhat charitably minded is the use of a charitable remainder trust.²¹ This type of trust permits an interest in the transferred property to be split. Thus, it is possible to provide income to a noncharity beneficiary (the donor or another), and at the end of a specified period of time have the property be distributed to the charity. Even though the charity does not receive the property until a future date, the donor is allowed a current income tax deduction for the actuarial value of the future interest. The only gift tax imposed is on the value of the intervening interest of the noncharitable beneficiary. There are a number of specific requirements that must be met to be entitled to the income tax deduction. For one who meets these requirements, some rather impressive income tax results are available.

There are two types of charitable remainder trusts: a charitable remainder annuity trust (CRAT) and a charitable remainder unitrust (CRUT). Both types of charitable remainder trusts must (1) be created under a written instrument; (2) pay at least annually a fixed sum or a sum certain to the noncharitable beneficiary for lifetime, or a period not to exceed 20 years; and (3) on expiration of the term, the principal must be held or distributed for the use or benefit of the charitable organization.²² In addition, each type of trust has specific requirements it must meet. (IRS sample charitable annuity trust forms are found in Revenue Procedures 2003-53, 2003-54, 2003-55, 2003-56, 2003-57, 2003-58, 2003-59, and 2003-60; IRS sample charitable unitrust forms are found in Revenue Procedures 2005-52, 2005-53, 2005-54, 2005-55, 2005-56, 2005-57, 2005-58, and 2005-59.²³)

A CRAT pays the noncharitable beneficiary a fixed annual annuity calculated as a fixed percentage of the property transferred or as a fixed dollar amount. Either type of annual annuity payment must be at least 5% of the initial value of the trust. If the income is insufficient to pay the annuity, then principal must be spent. No additional property may be transferred to the CRAT after it is established.²⁴

A CRUT pays the noncharitable beneficiary a payment that varies because it is computed annually as a percentage of the current value of the trust. As with the CRAT, the CRUT percentage payment must be at least 5% of the value of the trust.²⁵ It is permissible to set the payment at the lesser of the annual income from the trust or 5% of the value of the trust. If current income is less than the percentage payout, it can be made up in later years when the income exceeds the percentage limitation.²⁶ Because of its fluctuating formula, the CRUT must be valued annually to redetermine the current year's payment. Also, the CRUT permits additional property to be transferred to it, unlike the CRAT, which does not allow property to be transferred to the trust following the initial gift.²⁷

Caution: The charitable remainder trust must not pay an amount in any year greater than 50% of (1) the initial fair market value of the trust's assets in the case of a CRAT, or (2) the net fair market value of the trust's assets, valued annually, in the case of a CRAT.²⁸

Caution: The...