4. Charitable remainder trust
The charitable remainder trust enables an individual to make a substantial deferred gift to a favored charity while retaining a right to payments from the trust. Under the right circumstances use of such a trust offers multiple tax and nontax advantages, particularly to the individual who owns substantially appreciated property. These advantages include a charitable deduction resulting in reduced taxes, an increase in current cash flow, avoidance of capital gains upon a sale of the appreciated property, the eventual reduction or elimination of estate taxes, and the satisfaction of knowing that property placed in the trust will eventually pass to charity. When combined with a wealth replacement trust, the full value of the estate can still be preserved for heirs.
DURING LIFETIME the grantor, after establishing a charitable remainder trust, gives property to the trust while retaining a right to payments from the trust. A unitrust provides for the grantor to receive annually a fixed percentage of the trust value (valued annually), whereas an annuity trust provides for the grantor to receive annually a fixed amount. Either type of trust could require that payments be made for the joint lives of the grantor and another person, such as the grantor’s spouse.
At the time the property is given to the trust, the grantor can claim a current income tax deduction equal to the present value of the charity’s remainder interest. Upon receipt of the gift, the trustee will often sell the appreciated property and reinvest the proceeds in order to better provide the cash flow required to make the payments to the grantor. This sale by the trust is usually free of any capital gains tax.
The tax savings and increased cash flow offered by the use of a charitable remainder trust will often enable the grantor to use some or all of these savings to fund a wealth replacement trust for the benefit of his heirs, thereby providing for the tax effective replacement of the property transferred to the charitable remainder trust. If the wealth replacement trust is established as an irrevocable life insurance trustit is often possible to gain gift tax advantages during the grantor’s lifetime, while at death entirely avoiding inclusion of the life insurance proceeds in the estates of the grantor and the grantor’s spouse.
UPON DEATH the property placed in the charitable remainder trust passes to the designated charity. At the same time a tax-free death benefit is paid to the wealth replacement trust, which funds can then be held or distributed to the grantor’s heirs pursuant to the terms of this trust.
Information required for analysis & proposal
1. Fair market value of property transferred to trust.
2. Date of transfer to trust.
3. Payout rate (if unitrust) or amount (if annuity trust).
4. Payment frequency (annually, semiannually, quarterly, or monthly).
5. Age of person whose life determines length of payments.
6. Age of joint annuitant (if payout for two lives).
7. Discount rate (as published monthly by IRS).
The charitable remainder trust enables an individual to make a substantial deferred gift to a favored charity while retaining a right to payments from the trust. Under the right circumstances use of such a trust offers multiple tax and nontax advantages, particularly to the individual who owns substantially appreciated property. These advantages include a charitable deduction resulting in reduced taxes, an increase in current cash flow, avoidance of capital gains upon a sale of the appreciated property, the eventual reduction or elimination of estate taxes, and the satisfaction of knowing that property placed in the trust will eventually pass to charity. When combined with a wealth replacement trust, the full value of the estate can still be preserved for heirs.
DURING LIFETIME the grantor, after establishing a charitable remainder trust, gives property to the trust while retaining a right to payments from the trust. A unitrust provides for the grantor to receive annually a fixed percentage of the trust value (valued annually), whereas an annuity trust provides for the grantor to receive annually a fixed amount. Either type of trust could require that payments be made for the joint lives of the grantor and another person, such as the grantor’s spouse.
At the time the property is given to the trust, the grantor can claim a current income tax deduction equal to the present value of the charity’s remainder interest. Upon receipt of the gift, the trustee will often sell the appreciated property and reinvest the proceeds in order to better provide the cash flow required to make the payments to the grantor. This sale by the trust is usually free of any capital gains tax.
The tax savings and increased cash flow offered by the use of a charitable remainder trust will often enable the grantor to use some or all of these savings to fund a wealth replacement trust for the benefit of his heirs, thereby providing for the tax effective replacement of the property transferred to the charitable remainder trust. If the wealth replacement trust is established as an irrevocable life insurance trustit is often possible to gain gift tax advantages during the grantor’s lifetime, while at death entirely avoiding inclusion of the life insurance proceeds in the estates of the grantor and the grantor’s spouse.
UPON DEATH the property placed in the charitable remainder trust passes to the designated charity. At the same time a tax-free death benefit is paid to the wealth replacement trust, which funds can then be held or distributed to the grantor’s heirs pursuant to the terms of this trust.
Information required for analysis & proposal
1. Fair market value of property transferred to trust.
2. Date of transfer to trust.
3. Payout rate (if unitrust) or amount (if annuity trust).
4. Payment frequency (annually, semiannually, quarterly, or monthly).
5. Age of person whose life determines length of payments.
6. Age of joint annuitant (if payout for two lives).
7. Discount rate (as published monthly by IRS).
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