Charitable remainder trusts should flourish with increases in tax rates.

• Author: Robbins, Valerie C.

Charitable remainder trusts lost some of their appeal when tax rates were lowered in 1986. As tax rates again gradually increased, these trusts began to generate some interest, mostly from the very wealthy. But with tax rates expected to reach 36%-40% under President Clinton's proposals, charitable remainder trusts should again receive the attention of taxpayers, even those of modest wealth.

A charitable remainder trust enables a taxpayer to give income-producing property to charity while retaining the right to receive distributions from the trust for a period of time, generally, the donor's life expectancy or a number of years not to exceed 20. in the year the contribution is made, the donor receives a current deduction for the value of the interest that will pass to charity on termination of the trust. As tax rates increase, this deduction becomes more valuable. For example, giving away a remainder interest of $40,000 is worth $12,400 to a donor in the 31 % tax bracket (before state tax considerations). If tax rates increase to an effective rate of 40%, that same gift would be worth $16,000. In addition, the donor has a right to distributions for a period of time.

Sec. 664 contains a complex set of rules governing charitable remainder trusts. Despite the complexity, these rules allow much flexibility in how the terms of the trust are established. This makes charitable remainder trusts an excellent planning tool since the needs of the donor can be satisfied by a combination of terms and provisions. In certain situations, a charitable remainder trust can both satisfy a desire to give to charity and increase the economic return on the disposition of property. The comprehensive example on page 506 illustrates how this might work.

As stated earlier, charitable remainder trusts are not without complexity. Therefore, it is important to keep in mind the following points: * The donor cannot force the trustee to sell assets. * While there is much flexibility in setting the terms of the trust, the remainder value must equal at least 5% and the annual distribution to the income beneficiary must be at least 5%. * The trust terms cannot be altered to change payments to the noncharitable beneficiary.

In summary, a charitable remainder trust can be an excellent planning tool to increase cash flow, diversify investments and accomplish charitable goals.

Example: Advantages to Establishing a Charitable Remainder Trust

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