Charitable Remainder Trusts, a form of life-income gift, can have substantial benefits for the donor as well as Placer Land Trust. Like Charitable Gift Annuities and pooled income funds, a Charitable Remainder Trust (CRT), often referred to simply as a "remainder trust", can provide an immediate tax deduction and increased annual income. Depending upon how a donor funds the remainder trust, an individual may reduce capital gains and estate taxes. A CRT provides great flexibility to establish specific objectives and meet personal financial circumstances.

What is a Charitable Remainder Trust?

A CRT is an independent trust that holds assets. A donor transfers cash or appreciated property (stock, bonds, land, or other marketable property) into the trust, reserving an income interest for one or more beneficiaries. Depending upon the assets used to fund the trust, a trustee manages the cash or real property (generally selling the property and reinvesting the proceeds) to generate income to the beneficiaries. Usually, the trustee makes quarterly payments to the income beneficiaries that may continue either for the lives of the beneficiaries or for a fixed term up to 20 years. After the income interest ends, either by death or the conclusion of the term, the trust terminates. Then the trustee pays the remaining assets to the charity or charities named in the trust for whatever use the donor originally stipulated.

What Benefits Do I Gain From a Charitable Remainder Trust?

A CRT is most useful when a donor owns substantial resources, often highly appreciated assets, that earn a low rate of return (like stock) or may even cost the donor money to maintain (like land). When the trustee sells the asset, no capital gains tax is due on the sale, thereby preserving the maximum amount of principal for reinvestment. The donor converts a low-earning asset into a high-earning one without a significant loss of capital. If the donor sells the asset outright, without using the trust, state and federal taxes may devour as much as 35% of its value.

The donor also benefits by gaining an income tax deduction in the year the trust acquires the assets. The amount of the deduction depends upon the value of the donated property, the number and ages of the income beneficiaries, and the annuity rate selected. Since a CRT is not a part of the donor's estate, it also lowers their estate taxes.

Finally, for charities like Placer Land Trust, CRTs provide significant long-term financial support, including the establishment of permanent endowment funds.

What are the Disadvantages?

The major disadvantage is the donor and the heirs do not have access to the trust principal. Therefore, before establishing a CRT, donors should consider carefully whether other capital resources are sufficient to meet their future needs. The donor and the family cannot make any personal use of the trust's property or have financial dealings with the remainder trust other than to receive income payments.

Can I Use Real Estate to Fund a Charitable Remainder Trust?

Land can be an excellent asset to fund a CRT. Because land often appreciates greatly, a sale would trigger a large capital gains tax. When land funds the CRT, no capital gains tax is due. This trust often includes a clause stating the trustee will not begin making payments to the income beneficiaries until after the land sells and the proceeds invested in the trust.

If the land has agricultural, wildlife or open space value, then the donor should place a conservation easement on the land before placing it in the CRT. Otherwise, the trustee must sell the property for its full development value. Depending upon the nature of the restrictions, the easement will probably reduce the selling price slightly. However, the loss in value will usually qualify as an additional tax deduction.

How Do You Determine the Payment I Receive?

CRTs take two forms. A "unitrust" provides income to a beneficiary as a fixed percentage of the trust's assets, which the trustee determines annually. This payment must be at least 5% of the assets. The actual dollars paid will fluctuate annually as the value of the trust's assets changes. A second type, called an "annuity trust" provides income to a beneficiary as a fixed payment that equals or exceeds 5% of the original value of the assets contributed. The annuity trust payment remains constant. Most donors use the unitrust model, because if the principal in the trust grows, so will the income payments.

For example, suppose a donor establishes a 6% unitrust, and funds the CRT with $100,000 in stock. During the first year, the income beneficiaries will receive $6000. If the principal in the CRT grows to $105,000 after one year, the income payment in the second year would be $6,300. On the other hand, if the investments perform poorly and the principal diminishes to $90,000, the second year's payments would be only $5,400. Obviously, selecting a trustee and investment advisor can make a critical difference to the ultimate success of the CRT for both the income beneficiaries and Placer Land Trust.

How is My Tax Deduction Determined?

Placer Land Trust makes the calculations, using a computer program to factor in all these variables. For example, if a husband and wife, ages 75 and 70, establish a $100,000 remainder trust (unitrust) paying 6% of the principal value annually, their deduction would be $41,400. If they elect a 5% income rate, the deduction increases to $47,700. On the other hand, a single person, age 75, establishing a $100,000 unitrust with a 6% income rate, receives a $57,700 charitable deduction. If the person is 55 years old, the deduction is only $30,000.

Typically, with fewer and older beneficiaries, a donor receives a larger charitable deduction.

The general tax rules that apply to charitable deductions apply to CRTs as well. When donors give appreciated property, they may claim a charitable deduction up to 30% of their Adjusted Gross Income (AGI). A donor, who gives cash, can deduct up to 50% of AGI and may carry over any unused deduction for up to five years.

If you would like further information about remainder trusts or other forms of gift planning, please consult a trusted financial advisor.