Investment strategies unique to assets held in charitable remainder trusts.

• Author: Phelps, Mary Brooks
• Position: Brief Article

Most charitable remainder trust assets are invested using traditional asset allocation models, with significant amounts of assets invested in debt securities. Certain charitable remainder trusts possess unique characteristics that cause the traditional asset allocation models to be less than ideal when applied to their investment portfolios.

While a donor to a charitable remainder annuity trust (CRAT) or a charitable remainder unitrust (CRUT) and the charitable remainder beneficiary appear to have conflicting vested interests in the trust (high after-tax income versus a high remainder value), the optimal investment strategy for both the income beneficiary (the donor) and the remainder beneficiary (the charitable organization) is one that emphasizes asset growth.

When the trust realizes a capital gain, the trust's income beneficiary typically receives a high payout, with the benefit of receiving the lower capital gains rates on the amount of the payout in excess of the trusts ordinary income for the year (assuming ordinary income from previous years has been distributed). The receipt of capital gain income by the income beneficiary may be especially desirable in light of recent political developments that favor a decrease in the capital gains rates.

The charitable beneficiary also prospers under the "investing for growth" strategy; investments in...