'Win-Win-Win' Planning With Charitable Remainder Trusts
For years in the life insurance community, it seemed that charitable planning was much like the weathereveryone talked about it, but nobody did anything about it. In recent years, however, financial, economic, and social changes have resulted in a growing awareness and utilization of charitable planning techniques, particularly charitable remainder trusts.
The basic structure and operation of charitable remainder trusts are relatively simple. The donor creates an irrevocable trust with a written document, and transfers cash or other property to it. For a period of time chosen by the donor (lifetime or a stated term not exceeding 20 years), the donor or others (e.g. spouse or children), or both receive income payments from the trust at a rate chosen by the donor. At the end of the income period, the trust assets are transferred to the qualified tax-exempt organization(s) designated by the donor, which may include a private family foundation.
The trust can be designed as a Charitable Remainder Annuity Trust (CRAT) or a Charitable Remainder Unitrust (CRUT). Under a CRAT, the income payment is a stated percentage of the initial value of the trust assets, whereas under a CRUT, the income payment is a stated percentage of the current value of the trust assets when the payment is made.
A CRAT is simpler to administer and the income payments are predictable, but no additional contributions to the trust are permitted, and the purchasing power of the income payments may be eroded by inflation.
A CRUT is more complex to administer and income payments may fluctuate, but additional contributions can be made in the future, and it is more likely that the income payments will keep pace with long-term inflation.
A variation of the unitrust is the "Net Income with Make-Up" Charitable Remainder Unitrust (NIMCRUT). Ordinarily, the income payments from a CRT must be at least 5% of the trust assets, and the payments must be made at least annually. Under a NIMCRUT, the income payment can be the lesser of the stated percentage, or the actual income of the trust. Therefore, if the trust produces no current income, then no income payment is required.
Additionally, if the actual income payment in any year is less than the stated percentage, the cumulative deficit can be made up in future years.
Charitable remainder trusts have several tax advantages. The donor receives a current income tax deduction for a portion of the value of the assets transferred to the trust. Generally, the deduction will range from 30% to 70% of the value of the assets, depending on the amount and duration of the income payments and other factors.
In addition to the income tax deduction, the full value of the transferred assets will be deductible for purposes of federal gift and estate taxes. If the value of the transferred assets is greater than the donors cost basis, the donor will not have to recognize any gain or pay capital gains tax, and the untaxed gain will not be considered an item of "tax preference" for purposes of the alternative minimum tax.
If the CRT sells the appreciated asset, it will pay no capital gains tax because it is tax-exempt, thus resulting in more investable assets to produce income payments.
CRTs also have other financial advantages. If the donated asset produces little or no income (e.g. undeveloped real estate), the trust can sell the asset and invest the proceeds, which combined with the income tax deduction often results in a substantial increase in the donors after-tax income.
If the donors investments are heavily concentrated in only a few securities (for example, stock or options in the donors employer), greater diversification can be achieved by transferring the securities to a CRT, followed by the sale of the securities and re-investment of the proceeds in a more diversified portfolio.
