 |
Questions Frequently Asked by Donors About Charitable Remainder
Trusts
- Is there a restriction on the type of assets I can place in
the trust?
- Can I act as trustee?
- Can I ever change my trust?
- How often will I receive income?
- What are the legal maximum and minimum percentage amounts that
I can designate as my annual income from the trust?
- How is my income from the trust determined?
- How will I know the status of my trust?
- Can my creditors reach the trust assets?
- Why is reporting particularly important?
- What about trust flexibility?
- Can a unitrust be used as a type of retirement plan?
- What is a Wealth Replacement Trust?
- Who manages my trust assets?
Questions Frequently Asked About How CRTs are Administered
- Can I use my regular professional advisors to administer a
charitable trust?
- What is "Four-Tier Accounting"?
- What other types of tax complications are there?
- Why is reporting particularly important?
- What about trust flexibility?
Questions Frequently Asked by Donors About Charitable Remainder
Trusts
Is there a restriction on the type of assets I can place
in the trust?
Normally, the best assets to put in the trust are substantially appreciated
assets such as real estate, stocks, mutual funds or a closely held business:
Charitable organizations are exempt from capital gains taxes. If real estate
has a mortgage on it, the loan has to be at least five years old. Timber, cattle
and similar types of assets have also been used. You can put your personal residence
in a CRT only after you have moved out.
back to top
Can I act as trustee?
Yes, you can act as your own trustee; however, it is critical that all the formalities
of establishing and maintaining the trust be met. Accordingly, we suggest that
you retain professional advisors to assist in the set-up and annual administration.
There may also be estate tax consequences.
back to top
Can I ever change my trust?
The trust is irrevocable, but you can make certain changes once it’s established.
You can change trustees and the charitable remaindermen (the charitable beneficiary)
at any time. You can also change the type of investment strategy that is used
in the trust.
back to top
How often will I receive income?
The typical arrangement is to receive payments quarterly. You can specify annual,
semiannual, or even monthly payments if you wish.
back to top
What are the legal maximum and minimum percentage amounts
that I can designate as my annual income from the trust?
The minimum percentage that must be paid from a Charitable Remainder Unitrust
is 5%; the maximum amount is 50%. However, it should be noted that for the trust
to qualify, it must also meet a 10% charitable deduction test. This test ensures
that the charity will receive an amount that is estimated to be at least 10%
of the original value of the trust. Because of the complicated calculations,
computer software programs are normally required to make this calculation.
back to top
How is my income from the trust determined?
Your income is determined by multiplying the trust percentage you have chosen
by the fair market value of the trust assets on the last day of each year. This
establishes the annual income you will receive the following year. For example,
if you have a Type I 8% unitrust and the fair market value of the trust at December
31 of a given year is $400,000, you will receive $32,000 during the next year.
back to top
How will I know the status of my trust?
You will receive quarterly and/or annual reports that list the value of the
assets in the trust as well as the income currently being generated by the assets.
back to top
Can my creditors reach the trust assets?
No. Because the unitrust assets are removed from your estate and the trust is
irrevocable once established, the assets are beyond the reach of any creditor,
including the IRS.
back to top
Why is reporting particularly important?
Reporting accurate information is important to all parties to the trust. The
charitable organizations need to have an accurate estimate of values to properly
report anticipated deferred gifts on their annual reports. The payout of income
to the beneficiaries is made based upon amounts that need to be reported accurately.
Also, the Internal Revenue Service and the various state agencies audit the
returns that are filed, and if they are not accurate the trust may be disqualified.
back to top
What about trust flexibility?
Even though a charitable trust is an irrevocable document, there are many features
and options that can be included to provide flexibility for a donor. Normally
the charities selected as remainder beneficiaries can be changed, the trustees
and advisors can be replaced, and the income from a "net-income" charitable
trust can be adjusted annually as trust assets can be placed in growth vs. income-oriented
investments.
back to top
Can a unitrust be used as a type of retirement plan?
Yes. Many people who have high employee costs or who have exceeded current retirement
funding limits have started to set aside annual contributions into their unitrust.
While only a portion of the contribution is currently deductible, all of the
earnings accumulate tax-free.
back to top
What is a Wealth Replacement Trust?
This is a trust set up to provide for children or other beneficiaries who would
be eliminated from the estate when assets are transferred to a unitrust. The
typical arrangement is to set up an irrevocable life insurance trust. Insurance
premiums are gifted in; premium costs are frequently less than income tax savings.
back to top
Who manages my trust assets?
While you may select the types of trust assets that you prefer, we recommend
that you retain a professional money management firm to oversee asset diversification.
back to top
Questions Frequently Asked About How CRTs Are Administered
Can I use my regular professional advisors to administer
a charitable trust?
Typically, you should choose a specialized advisor or entity that understands
the complexity of charitable trusts. Serious complications, including the disqualification
of your trust, can be the result of an inadvertent error. Trust administration
also should be integrated with investment management and sound investment policies
for-term success. Some of the complexities are pointed out below.
back to top
What is "Four-Tier Accounting"?
This is an accounting provision that was put in the tax laws to remedy past
abuses. On a simplified basis, it determines that distributions generally come
first from ordinary income, second from capital gains on a cumulative net basis,
third from tax-exempt income, and fourth from corpus (or the amount you have
donated). All of these items must be tracked throughout the life of the trust
to correctly characterize distributions and avoid serious tax complications.
back to top
What other types of tax complications are there?
Many tax complications arise from the necessity of carefully valuing certain
kinds of donated property; for non-market assets, a formal appraisal is required
for submission in a strict format. Additionally, if there is any debt on the
property or if certain other kinds of assets are owned, there may be significant
problems that could disqualify the inclusion of these assets in the trust. Once
the trust is created, private foundation rules generally apply. These rules
prohibit self-dealing, excess business holdings, and a number of other activities.
Again, failure to pay close attention can be detrimental.
back to top
Why is reporting particularly important?
Charitable Remainder Unitrusts are split interest trusts; that is, there is
an income beneficiary and a remainder beneficiary.
The donor receives income from the trust and has a legitimate,-term interest
in the stability, inflation protection and growth of that income. If the relationship
is carefully nurtured and communication remains effective, the donor is much
more likely to continue to support the organization.
The downside of poor or poorly communicated investment performance may include
the replacement of trustees and charitable remaindermen.
back to top
What about trust flexibility?
A Charitable Remainder Unitrust can be used as a lifetime financial and estate
planning tool, but only if it is drafted for maximum flexibility and the donor
(or someone who answers to the donor) serves as the primary trustee. A flexible
trust document will give authority to hire a competent third-party administrator
as well as a professional money manager to invest trust assets in a manner consistent
with the trustee’s investment objectives and risk tolerance.
Flexible asset management is possible because trust administration services
are separated from those of asset (money) management, and the trustor (in some
cases) can serve as trustee.
back to top
|
