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主頁 > 理財文章 > 遺產規劃與慈善捐獻 > Charitable Remainder Trust  

Charitable Remainder Trust

Charitable remainder trusts, a form of life-income gift, can have substantial benefits for the

donor as well as the Charity. Like charitable gift annuities and pooled income funds,

charitable remainder trusts, often referred to simply as remainder trusts or CRTs, can provide an

immediate income tax deduction and increased annual income. Depending on how a donor funds

the remainder trust, an individual may reduce capital gains and even estate taxes. A remainder

trust provides great flexibility to establish specific objectives and meet personal financial

circumstances. Because remainder trusts are more complex than gift annuities, we recommend

that donors use them when the gift has a value of at least $100,000 and the income beneficiaries

are not yet 75 years or older.

 

WHAT IS A CHARITABLE REMAINDER TRUST?

 

A charitable remainder trust is an independent trust that holds assets. A donor transfers cash or

appreciated property (stock, bonds, land, or other marketable property) into the trust, reserving

an income interest for one or more beneficiaries. Depending upon the assets used to fund the

trust, a trustee manages the cash or real property (generally selling the property and reinvesting

the proceeds) to generate income for the beneficiaries. The trustee can be one or more

individuals and/or a trust department, and, in some cases, the donor. The charity benefiting from

a trust can serve as trustee. The Charity can serve as trustee for remainder trusts and this designation as such is irrevocable. 

 

Usually, the trustee makes quarterly payments to the income beneficiaries that may continue

either for the lives of the beneficiaries or for a fixed term of up to 20 years. After the income

interest ends, either at the beneficiary’s death or the conclusion of the term, the trust terminates.

The trustee then pays the remaining assets in the trust to the charity or charities named in the

trust for whatever use the donor originally stipulated. The following diagram explains the

relationship among the donor, trustee, income beneficiaries, and charity in a charitable remainder

trust:

 

ARE THERE AGE LIMITATIONS IN ESTABLISHING A CHARITABLE REMAINDER TRUST?

 

To qualify for beneficial income tax treatment, including a charitable income tax deduction for

the donor, a charitable remainder trust must be established such that at least 10 percent of the

amount contributed to the trust will ultimately pass to the charity when the donor dies. The IRS

has actuarial tables to determine whether, based on the donor’s age at the time the trust is funded

as well as other factors, this requirement will be met. Accordingly, a trust with younger

beneficiaries could have a problem satisfying this requirement. 

 

WHAT BENEFITS DO I GAIN FROM A CHARITABLE REMAINDER TRUST?

 

A charitable remainder trust is most useful when a donor has substantial resources and owns

highly appreciated assets that earn a low rate of return (like stock) or cost the donor money to

maintain (such as land). When the assets are transferred to the trust and then sold, no capital

gains tax is due on the sale. This preserves the maximum amount of principal for reinvestment.

The donor is thus able to convert a low-earning asset into a high-earning one without a

significant loss of capital. If the donor sells the asset outright, rather than through the trust, state

and federal taxes may devour as much as 18 percent of its value.

 

The donor also benefits by gaining a charitable income tax deduction in the year the trust

acquires the asset. The amount of the deduction depends upon the value of the donated property,

the number and ages of the income beneficiaries, and the annual payout rate selected. If the

donor cannot use the deduction in the year the trust is established, he/she can carry the unused

deduction forward for up to five years and apply it against subsequent income. Since a remainder

trust is not a part of the donor’s estate, it may also lower estate taxes in larger estates. The assets

in a charitable remainder trust pass without the expense and delay of probate. Finally, for charities, remainder trusts provide significant long-term financial support, including the establishment of permanent endowment funds.

 

WHAT ARE THE DISADVANTAGES?

 

The major disadvantage is that the donor and heirs do not have access to the trust principal

during their remaining lifetimes. The donor and family cannot make any personal use of the

trust’s property other than to receive income payments. Therefore, before establishing a

charitable remainder trust, donors should consider carefully whether they have other capital

resources that will be sufficient to meet their future needs.

 

CAN I USE REAL ESTATE TO FUND A CHARITABLE REMAINDER TRUST?

 

Land can be an excellent asset to fund a remainder trust. Because land that has been owned for a

long time is often greatly appreciated, a sale by the individual owner would trigger a large capital

gains tax. When land funds the remainder trust, no capital gains tax is due upon the sale of the

land by the trust. Charitable Remainder Trusts often include a clause stating that the trustee will

not begin making payments to the income beneficiaries until after the land sells and the proceeds

are invested in the trust.

 

If the land has agricultural, wildlife, or open space value, then the donor should place a

conservation easement on the land before placing it in the remainder trust. Otherwise, the trustee

may be required by law to sell the property for its full development value. Depending on the

nature of the restrictions, the easement will probably reduce the selling price. However, the loss

in value will usually qualify as an additional income tax deduction.

 

HOW DO YOU DETERMINE THE PAYMENT I RECEIVE?

 

Remainder trusts take two forms. A “unitrust” provides income to a beneficiary as a fixed

percentage of the trust’s assets, which the trustee recalculates annually. This payment must be at

least 5 percent of the assets. The actual dollars paid will fluctuate annually as the value of the

trust’s assets changes. The second form, called an “annuity trust,” provides income to a

beneficiary as a fixed payment that equals or exceeds 5 percent of the original value of the assets

contributed. The annuity trust payment remains constant, regardless of changes in the trust value.

Most donors use the unitrust model because if the principal in the trust grows, so will the annual

income payments. On the other hand, if the principal in a unitrust decreases in value, the annual

payment to the donor would also decrease.

 

Example: A donor establishes a unitrust paying 6% annually, and funds the trust with $100,000

in stock. During the first year, the income beneficiaries will receive $6,000. If the principal in

the remainder trust grows to $105,000 after one year, the income payment in the second year

would be $6,300. On the other hand, if the investments perform poorly and the principal

diminishes to $90,000, the second year's payments would be only $5,400. Obviously, selecting a

trustee and an investment advisor can make a critical difference to the ultimate success of the

remainder trust for both the income beneficiaries and the Charity.

 

HOW IS MY TAX DEDUCTION DETERMINED?

 

The income tax deduction for a remainder trust is a function of several factors:

the value of the donated asset.

the type of remainder trust (either an annuity trust or unitrust).

the annual income rate selected.

the number and ages of the income beneficiaries (except where a fixed term is used, in

which case the number of years in the term).

the federal discount rate, which changes monthly.

 

The Charity makes the calculations using a computer program to factor in all these

variables. For example, if a husband and wife, ages 75 and 70, establish a $100,000 remainder

trust (unitrust) paying 6% of the principal value annually, their deduction would be

approximately $39,300. If they elect a 5% income rate, the deduction increases to approximately

$45,600, although their annual income will be substantially lower ($5,000 vs. $6,000 in the first

year).

 

On the other hand, a single person, age 75, establishing a $100,000 unitrust with a 6% income

rate, would receive approximately $55,600 in charitable deductions. If the person is 55 years old,

the deduction would be only $28,000. Typically, if there are fewer and older beneficiaries, a

donor will receive a greater charitable income tax deduction. The general tax rules that apply to

charitable deductions apply to remainder trusts as well. When donors give appreciated property,

they may claim a charitable deduction up to 30 percent of their adjusted gross income (AGI). A

 

donor who gives cash can deduct up to 50 percent of AGI. In either case, the donor may carry

over any unused deduction for up to five years.

 

HOW DOES A CHARITABLE REMAINDER TRUST COMPARE TO A CHARITABLE GIFT ANNUITY?

 

Charitable remainder trusts are often advisable for donors who with to make a planned gift with a

value of $100,000 or more; but want to retain lifetime control over investment of the assets so

they can invest for growth and/or income, as they desire, and make additional contributions to

the trust over time as their assets and personal objectives permit. Charitable remainder trusts also

work particularly well in situations where the beneficiaries are relatively young, so that the

principal and annuity payments may appreciate over their remaining lifetimes. Conversely,

charitable gift annuities work well for gifts between $5,000 and $100,000, or when the donor

wants to be assured of regular, fixed income payments for his or her lifetime.

 

HOW DO I GET STARTED?

 

As with the preparation of a will, your attorney will be the principal advisor in the preparation of

a charitable remainder trust. In addition, you may wish to discuss inclusion of such a trust in

your estate and financial plan with your accountant and how it will impact your current income

tax liability.

 

Your attorney will typically prepare the charitable remainder trust document after discussing with

you the specific manner in which you would like to structure the trust.