Chapter 29 - § 29.3 • CHARITABLE TRUSTS

• Jurisdiction: Colorado

§ 29.3 • CHARITABLE TRUSTS

Irrevocable trusts include those of the charitable type. The two most popular forms of charitable trusts (also known as split interest trusts) are (1) the charitable remainder trust (CRT), and (2) the charitable lead trust (CLT). Either of these two types of trusts can be an annuity trust or a unitrust.

§ 29.3.1—The Annuity Trust Versus the Unitrust

An annuity trust pays a specific dollar amount each year of the trust, regardless of the changes in value of the trust assets. The unitrust, on the other hand, pays out a specific fixed percentage of the value of the trust assets, which are revalued each year. Therefore, even though the fixed percentage remains the same each year, the payout amount changes so long as the value of the trust assets fluctuates.

§ 29.3.2—Features of the Charitable Remainder Trust

The charitable remainder trust provides for a periodic (but not less than annual) payout amount from the trust to the creator (grantor) of the trust (or some other beneficiary designated in the trust document by the grantor) with the remainder ultimately becoming payable to a charity. The trust must pay at least 5 percent (but not more than 50 percent) of its value each year to the grantor. I.R.C. § 664(d)(1). The remainder of the trust that is distributed to charity must also be at least 10 percent of the initial value of the contributions to the CRT. I.R.C. § 664(d).

In lieu of paying a fixed percentage amount from inception, a charitable remainder unitrust (CRUT) can instead pay a net income amount to the grantor for an initial period and then convert to paying a fixed percentage amount upon the occurrence of specific events (provided certain criteria are met). See Treas. Reg. § 1.664-3(a)(1)(i)(c). The CRUT can also "make up" for the shortage of the net income amounts under the fixed percentage amounts once converted to paying a fixed percentage amount (known as a NIMCRUT).

The term of a CRUT can be as long as 20 years (or, alternatively, can be based on the life expectancy of one or more individuals). I.R.C. § 664(d)(1).

The ability to convert taxable gains into tax-free income is often touted as a main attraction of a CRT, whether it is a CRUT or a charitable remainder annuity trust (CRAT). This feature, however, is misleading in that distributions made from a CRT to the grantor retain their character for income tax purposes. As a result, the CRUT is a deferral mechanism — not a tax avoidance mechanism. Even if the CRT...