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Charitable Remainder Trust
"Be imitators of God, therefore, as dearly loved children and live a life of love, just as Christ loved us and gave himself up for us as a fragrant offering and sacrifice to God."
Ephesians 5:1,2
When you create a Charitable Remainder Trust (CRT), you irrevocably transfer money, securities, or other assets to a trust that will pay you an income for life or for a period of years. If you wish, the trust also can pay an income to another beneficiary of your choice. At the death of the surviving beneficiary, the remaining principal in the trust goes to Tabernacle Baptist Church.
Choosing a charitable remainder trust is a little like shopping for a new car - the right one depends on your personal needs. First, you must decide how much you would like to put into the trust. Second, you determine the income you would like to receive from the donated assets. Third, you decide which type of charitable remainder trust will work best for you.
When people talk about charitable reminder trusts, they are generally referring to one of two highly structured plans created by the Tax Reform Act of 1969:
1. The Charitable Remainder Annuity Trust (CRAT), and
2. The Charitable Remainder Unitrust (CRUT) with the following variations:
— Regular Charitable Remainder Unitrust
— Net Income Charitable Remainder Unitrust
— Net Income Charitable Remainder Unitrust with Makeup Provision
— Charitable Remainder Flip Unitrust
The trusts listed above are different from each other in three basic ways: 1) the form of the beneficiary's payment, 2) the ability to make additional contributions, and 3) the way in which the donor's tax consequences are calculated.
Click the buttons below to learn more about the CRAT and CRUT.
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Charitable Reminder Annuity Trust |
Charitable Remainder Unitrust |
Tax Benefits of a Charitable Remainder Trust
When you fund a Charitable Remainder Trust, you immediately obtain the benefit of a sizable income tax charitable deduction. This is equal to the present value of the remainder interest ultimately payable to Tabernacle Baptist Church, based on Internal Revenue Service tables of life expectancy factors. The older the beneficiary, the greater the charitable deduction.
Who Can Benefit From A Charitable Remainder Trust?
You may wonder if your circumstances match those of others who decided to create a Charitable Remainder Trust. In fact, people of widely varying ages and financial situations do benefit, as these examples illustrate:
- An individual nearing retirement. You may have personal investments that are highly appreciated, yet have a low yield. By using these assets to fund a unitrust or annuity trust, you can avoid the capital gains tax trap and supplement your income from a qualified retirement plan.
- A retired couple or individual between ages 60 and 75. If you have a healthy life expectancy, over a longer term a unitrust can provide a hedge against inflation, assuming the trust investments benefit from a gradually increasing market value that exceeds the usual periodic downturns.
- An individual over age 75. For you, an annuity trust has a special appeal. You may be more concerned about receiving a fixed and unchangeable income payment than beating long-term inflation.
- A single person over age 80. You might find that a unitrust with a term of 20 years is attractive. The payout balance of the term extending beyond your lifetime can be distributed to your children, grandchildren or anyone you designate.
- Someone supporting an elderly parent. You may be seeking a good way to increase a parent's income and also make a philanthropic contribution. A charitable remainder trust can accomplish both objectives.
Which Is Better: Annuity Trust or Unitrust?
Whether you choose an annuity trust or a unitrust depends primarily on your economic outlook. With an annuity trust, you receive the same fixed amount each year that you choose at the beginning. This is advantageous when you want to be certain of the dollars you will receive. If you are concerned about the possibility of recessionary times and falling market values, the annuity trust has greater appeal. Although you cannot add to this annuity trust later in order to increase your income, you can always create a new trust for that purpose.
In comparison, a unitrust may be a hedge against inflation. If you foresee economic growth resulting in appreciation of the trust's assets, you will favor a unitrust. The valuation can rise or fall, but over time a well-managed unitrust may offer better protection of your purchasing power than fixed dollar payments. A further advantage is that if you want to enlarge the trust later, you can make additional contributions without the cost of creating and administering more than one trust.
- Annuity trust: Pays you a fixed dollar amount.
- Standard Unitrust: Pays you an amount equal to a fixed percentage of the net fair market value of the trust assets as recalculated yearly.
- Net income with makeup Unitrust: The trust pays the lesser of the fixed percentage specified by the trust agreement or the actual trust income. Such trusts provide, however, that in any year the trust income exceeds the fixed percentage payout, the excess must be used to make up any prior deficiencies. It offers great flexibility in retirement planning, because income can effectively be deferred until later years.
- Net income with no makeup Unitrust: Pays you the trust's actual income or a fixed percentage of market value (as recalculated yearly), whichever is less. Deficiencies are not made up. This type is used by donors who want to maximize the benefits to the charitable organization.
- Flip Unitrust: Set up as either of the last two types, this trust converts to a standard unitrust on a triggering event, such as the sale of an "unmarketable" asset used to fund the trust.
Consult Your Financial Advisor
When considering a Charitable Remainder Trust, consult your financial and estate planning advisors. They will help you determine if a Charitable Remainder Trust is right for you.
If you would like more information about planned giving at Tabernacle, contact Dr. Bruce Minett - Executive Associate Pastor. He will be happy to speak with you.
Disclosure:
The information in the planned giving section of Tabernacle's web site is not designed to act as legal or financial advice. While Tabernacle Baptist Church is glad to provide general information, this information should be reviewed by professional, financial advisors prior to any action.
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