Home
NewsEventsLocationContactUs
Print Page

Charitable Remainder Trust

When you create a charitable remainder trust, you irrevocably transfer money, securities or other assets to a trust that will then 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 Kingsbury Country Day School.

You can design your trust to fit your own special needs. First, you decide how much you'd like to put into the trust. Second, you determine the income you'd like to receive from the donated assets. The rate of income return you select must be at least 5 percent. Usually, the rate selected is 5 percent to 7 percent. The best rate for you will depend upon the number of beneficiaries you select and their ages. Third, you decide which type of charitable remainder trust will work best for you.

Charitable Remainder Trust Types

Charitable remainder trusts come in five types. Our investment advisor can help you decide which type is best for you should you need his advice.

  • 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.

There are wide-ranging tax savings which can be realized when you create a charitable remainder trust. First, when you fund the 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 Kingsbury Country Day School, based on Internal Revenue Service tables of life expectancy factors. The older the beneficiary, the greater the charitable deduction. Highly appreciated assets that generate low current income are an ideal funding medium. While you'd be reluctant to sell such assets directly because of the tax you would pay on the gain, you can transfer them to the trust without incurring the capital gains tax. The trust could sell the assets without incurring any tax and then reinvest the proceeds in order to secure a higher current income yield. Perhaps over the years your personal investments have grown handsomely, but you now realize that their yield is grossly inadequate. Unfortunately, if you sell and reinvest in higher yielding securities, you'll lose a large part of your gain to taxes. The answer? Transfer your appreciated securities to a charitable remainder trust. In return for your gift, you might get an income two to four times greater than the current dividend from the typical growth stock.

Example

George, aged 75, owns several stocks with a market value of $100,000, but they pay dividends of only $2,000 a year, or 2 percent of market value. He decides to transfer these securities to a charitable remainder annuity trust that will pay him $7,000 a year, increasing his gross income by $5,000. If George sold his stocks instead, he would pay an enormous tax on his capital gain. Their cost basis is $30,000, compared to the current market value of $100,000, resulting in a gain of $70,000. At a federal capital gains tax rate of 15 percent, the tax would be $10,500. This would leave him with only $89,500 to reinvest, so he would have to find stocks that pay a dividend of more than 8 percent to receive the same $7,000 his trust can pay him.


Note: The information on this site is not intended as legal, tax, or investment advice. For such advice, please consult an attorney, tax professional, or investment professional.