There are two different types of charitable remainder trusts:
A charitable remainder uni-trust is a popular way to achieve tax benefits as well as a fixed annual percentage on the value of the assets in the trust. The assets are revalued annually and, if the trust value changes, the payment to the beneficiary(s) changes.
A charitable remainder annuity trust is set up to pay a fixed rate of return based on the initial valuation at the time the property is placed in the trust. The trust assets are never revalued.
Charitable Remainder Trust
A Charitable Remainder Trust is established for the life of the donor (also trustor or grantor) and/or for the life of any beneficiary(s) and is irrevocable. While there are certain changes that may be made, once the trust is established, it cannot be revoked. If it is desired, the income period of the trust can be established for a specified period of time not to exceed twenty years.
The twenty-year maximum does not apply if the trust life is based on the life expectancy of the income beneficiary(s).
Because the income is paid to one or more parties and, at the end of the trust’s life, the principal and any undistributed interest is paid to a different party, a charitable remainder trust is called a split interest trust. The income portion of the trust may be either an annuity income or a uni-trust income.
An annuity income is calculated at the time the trust is established in the trust agreement. It is a fixed amount of dollars based on the then market value of the trust. If the assets of the trust go up in value, the income portion does not change.
With a unitrust, the assets of the trust are revalued annually and the percentage rate established in the trust agreement determines the dollar amount of the unitrust interest. If the value of the principal in the uni-trust declined, the value of the interest portion of the uni-trust would decline as well. The uni-trust interest value would increase if the value of the trust assets increased.
A charitable remainder trust is an attractive planning tool for the disposal of highly appreciated assets. While the assets revert to the charity rather than the heirs of the estate, the use of an irrevocable life insurance trust in conjunction with a charitable remainder trust could replace the asset’s value for the heirs.
Net Income Charitable Remainder Trust
This variation of a uni-trust provides that either the specified fixed percentage of the trust assets or the net income of the trust is distributed to the beneficiary, whichever is less. This type of trust is often used to handle real estate as there is no fixed distribution requirement, giving the trustee time to arrange an orderly sale of the property. A net income charitable remainder uni-trust can be an excellent way to donate appreciated property and turn it into an income stream as well as acquire tax benefits.
A donor may also add a ‘makeup provision” to the trust. This allows a trust to distribute more than the fixed percentage of the assets in years where the trust’s income exceeded the fixed percentage. In this manner, previous years shortages, when the trust was not able to earn the fixed percentage payment, may be made up.
Your contact at Dani’s Foundation is:
Martha Simmons
Executive Director, 1600 Broadway, Suite 2400, Denver, CO 80202
PHONE: 303.601.1881
FAX: 970.532.1077
martha@danisfoundation.org
PLEASE NOTE:
Individual financial circumstance will vary. The information on this site does not constitute legal or tax advice. As with all tax and estate planning, please consult your attorney or estate specialist.
