Charitable Remainder Trusts

Consider a Charitable Remainder Trust

Generally:

• A gift of a remainder interest to charity will entitle the donor to an income tax charitable deduction if the trust is a CRT described in §664

• Allows “bunching” of charitable gifts to protect itemizing. Consider a Donor Advised Fund as the charitable donee.

• A CRT is an irrevocable trust that either pays a fixed dollar amount or fixed percentage of its initial value—a charitable remainder annuity trust (CRAT) or a fixed percentage of its annually determined value—a charitable remainder unitrust (CRUT) - to a noncharitable beneficiary for life or for a term of up to 20 years

• The trust terminates in favor of charity.

Characteristics of a CRT

• The donor is entitled to a charitable deduction for income, gift and estate tax purposes for the present value of the remainder interest given to charity

• The CRT as an entity is exempt from federal income taxes. No capital gain is realized by the trust on the sale of the contributed assets.

  • Exception: A 100% excise tax is imposed if the CRT has unrelated trade or business income (UBTI)

Common elements of a CRAT and CRUT

• The annual payout must be a minimum of 5%

• The annual payout may not exceed a maximum of 50%

• The duration of the non-charitable interest in the trust may not exceed either the life of the non-charitable beneficiary or 20 years

• Other than the annuity or unitrust payment, a CRT can make no payment to or for the use of any person other than the charitable organization.

• There must be a remainder interest in the trust for the benefit of charity equal to at least 10% of the initial trust value.

• There is a 5% exhaustion requiring that the annuity payable to the non- charitable beneficiary cannot be so great that there is a more than 5% chance that the corpus will be exhausted before the charity receives its interest. Rev. Rul. 70-452.

  • However, Rev. Proc. 2016-42 provides relief from the 5% test. The Rev. Proc. provides for early termination of the trust (and thus the end of the ability to make any more annuity payments) on the date immediately before the date on which any annuity payment would be made, if the payment of that annuity amount would result in the value of the trust corpus, when multiplied by a specified discount factor, being less than 10 percent of the value of the initial trust corpus.