Charitable Trusts

The principal remaining in the trust then becomes payable to your named individual beneficiaries. In an annuity trust, the charity receives a fixed amount based on the initial contribution to the trust. In a unitrust, the charity receives a fixed amount based upon the value of the trust assets on either December 31 or January 1 of each year the lead period is in existence.

Charitable Remainder Annuity Trusts

A charitable remainder annuity trust is a good way to guarantee yourself a steady income stream while the principal eventually goes to charity. Also known as a CRAT, this type of trust pays a fixed annuity amount annually to one or more designated recipients. Think of it as the opposite of a charitable lead trust. With a CRAT, at least one of the recipients is not a charity. That recipient is often you or your spouse or another family member.

As the grantor, you turn the assets over to a trustee to be held for the benefit of the recipients. All non-cash assets are then sold without triggering a taxable event, the proceeds of which are then used to purchase investments that will optimize the recipients’ income. The noncharitable beneficiary receives the same amount of income each year, it must be at least 5 percent of the trust’s value, and no more than 50 percent of the fair market value of the assets. The recipient must pay ordinary income taxes on the funds received.

A CRAT lasts until the beneficiary’s death or for a period of 20 years or less. At that time, the remaining funds are then donated to the charitable beneficiary. If the beneficiary dies in debt, the funds in a CRAT are not available to creditors and pass to the charity.

Charitable Remainder Unitrust trust

A “CRUT” differs from a CRAT in that the trust’s value is revalued annually. That changes the amount of the annual distribution to the noncharitable beneficiary. Unlike other charitable trusts, you can continue contributing to the trust after its inception. Those contributions also affect its value.

Benefits of Charitable Trusts

A charitable trust can reduce or even eliminate the taxes on your estate or your personal taxes. For instance, if you place highly appreciated real estate or securities into your charitable trust, you avoid paying capital gains taxes when these assets are sold.

With a CRAT, the donor receives a one-time tax deduction based on the value of the assets placed in the trust. A CRAT or CRUT provides income to you or another named beneficiary.