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CHARITABLE TRUSTS

Read the WARNING! first.

Although the names of certain charitable trusts might appear daunting, charitable trusts are not complicated. They share several similarities. Charitable trusts provide you with an income, a charitable tax deduction, and estate tax benefits. These trusts can be established during your lifetime or through your Will.

Simply stated, a charitable trust is a document in which you irrevocably transfer money or valuable property to a trustee. The gift is then invested, and the trustee pays an income to you (or any other beneficiary you name) for life. Upon the death of all life beneficiaries, the assets of the trust pass to the beneficiary, subject to any restrictions you may have specified at the time that the trust was established. The payment period may be extended to cover the lifetimes of two or more people named by you before the property remaining in the trust passes to the beneficiary.

Charitable Remainder Annuity Trust

The Charitable Remainder Annuity Trust ("CRAT") is usually funded with a gift of cash or marketable securities. These assets are irrevocably transferred to the trustee of the CRAT. The CRAT pays a fixed income to one or more persons for life or for a selected term of up to 20 years.

The annuity amount does not change. The annuity amount is fixed when the trust is established and it must be at least 5 percent of the initial trust value. After the income interests end, the trust assets go to the beneficiary to be used as directed in the trust document. The key features of the CRAT are:

Retain a fixed income for life (enabling many donors to make a larger gift than they might have initially thought was possible);

Obtain an immediate income tax deduction;

Not recognize capital gain when you make a gift of assets that have appreciated.

Charitable Remainder Unitrust

The Charitable Remainder Unitrust ("CRUT") is a special trust that pays income to family members. After all of the income payments have been completed, the remainder is distributed to a qualified beneficiary or beneficiaries. The person who establishes the trust, (called the "Grantor"), may select the trust percentage, the persons to receive the income from the trust, and the beneficiary that will receive the principal of the trust after all income payments are completed. The major benefits of the CRUT are: bypass of capital gains tax, increased income and a charitable income tax deduction.

The CRUT, like the Charitable Remainder Annuity Trust, is set up by irrevocably transferring assets to the trustee of the trust. You receive a fixed percentage of the net fair market value of the trust's assets as revalued each year. In other words, when your unitrust increases in value, your income payment will increase; when the unitrust decreases, so will your income. The amount paid annually from the trust is determined by multiplying the full market value of the unitrust's assets each year by a percentage agreed upon at the time the trust is established. By law, the percentage cannot be less than 5 percent.

A variation of the CRUT allows you to receive the net income from the trust or the fixed percent designated when the trust is established, whichever is less. Another variation provides that should the income from the CRUT be less than the stated fixed percentage in certain years of the trust, the trustee will make up this shortfall in later years when the trust income exceeds the stated percentage. This option can provide greater flexibility than the standard unitrust or annuity trust.

A CRUT offers the following benefits:

Increase income stream;

Potential growth of principal and income;

Charitable tax deduction when gift is made;

Avoids capital gain tax when trust is created;

Federal estate tax savings;

Income may be favorably taxed;

Additional contributions may be made to trust;

Opportunity to provide supplemental income for another person.

Charitable Lead Trust

Charitable lead trusts ("CLT") are the reverse of charitable remainder trusts in that a stream of income is first paid to the beneficiary for a term of years, after which the property goes back to the donor or passes to another non-charitable beneficiary chosen by the donor.

The CLT pays a distribution, according to a formula spelled out in the trust, to the charity for a specified period of time. After that period of time the principal of the trust is paid to the non-charitable "remainder beneficiary" designated by the grantor. Typically, the remainder beneficiary is a member of the grantor's family, other than the grantor or his spouse. Many people use a CLT to reduce or eliminate the gift tax cost of transferring wealth to children or grandchildren and to give appreciated property to heirs without further gift or estate tax liability. A CLT can be established during your lifetime or by your Will.

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For assistance with a Charitable Trust, contact us.