Charitable Remainder Trusts
Charitable remainder trusts are a charitable planning option which permit more flexibility and control than charitable annuities. The architecture of these trusts is as follows: the trust grantor transfers funds into an irrevocable trust but continues to receive distributions of a specific dollar amount, similar to an annuity, or a set percentage of the trust assets each year, for instance, 10%. The latter is often referred to as a charitable remainder unitrust, or CRUT. The grantor will receive a charitable deduction based on the annual pay out and her age, the higher the pay out, the lower the deduction and the higher her age, the higher the deduction. Charitable remainder trusts usually last for the grantor’s lifetime, but can also pay out for a specific number of years. In addition, it can pay to the grantor’s children or others.
Charitable remainder trusts are often used when the grantor owns highly-appreciated property, whether real estate or stock that she would like to sell, but is reluctant to pay taxes on the accumulated capital gains. If the property is transferred to charitable remainder trust, the capital gains tax on its sale can be amortized over the projected life of the trust rather than having to be paid immediately.
While a charitable remainder trust is more complex and expensive to create or administer than a charitable annuity, it leaves the grantor with more control. The grantor can select and change the trustee and even serve in that role herself. She or the trustee she selects can also change the ultimate charitable beneficiary or beneficiaries if she changes her mind over time.
Here’s how this can work:
John Jorgenson owns a commercial building that has appreciated in value during his life, especially in recent years with a hot real estate market and the growing popularity of the neighborhood where the building is located. John’s getting older and no longer wants to manage the building, but he also doesn’t want to pay the substantial taxes on capital gains that will be due on his sale of the building. He doesn’t need the capital—after all, it was always tied up in the building—but could still use some income from the investment. His solution is to transfer the building to a charitable remainder unitrust that will pay him 5 percent of the trust investments each year. The trust sells the building for $1 million which is then invested in a diversified stock and bond portfolio. The trust pays John $50,000 a year (or a bit more or less depending on how the investments do). Some of this is taxable as capital gain. At John’s death, the remaining funds will be paid to John’s alma mater, unless he changes his mind, which he has the right to do as long as he directs the proceeds to another charity.