Charitable Remainder Trusts § 664

  • Irrevocable trust used to transfer money or property to charity

  • Grantor or other non-charitable beneficiary collects income/annuity for their life or a fixed term up to 20 years

  • Income beneficiaries must receive distributions annually

  • The payout can’t be less than 5% or more than 50%

  • Grantor receives an immediate income tax deduction in the amount of present fair market value of the remainder interest to charity

  • Must be able to itemize

  • Charitable portion has to be at least 10% of the property contributed

  • Income, annuity and remainder interests valued using IRC § 7520 rate

  • CRATs/CRUTs get a larger deduction when rates are high

  • 120% of the applicable federal midterm rate (AFR, compounded annually) for the month in which the valuation date falls – 3.6% for November 2018

  • Trust is tax exempt – UBTI taxed at 100%

  • Ordering rules – 1 – ordinary income, 2 – capital gains, 3 – tax free income and 4 – distribution of trust corpus (principal)

Worst in First Out -

  • Tier 1: Ordinary Income (Worst)
    •    Interest, rents, royalties, nonqualified dividends (35% maximum rate)
    •    Qualified dividends (15% maximum rate)

    Tier 2: Capital Gains
    •    Short-term gain (35% maximum rate)
    •    Collectibles gain (28% maximum rate)
    •    Depreciation recapture gain (25% maximum rate)
    •    Long-term capital gain (15% maximum rate)

    Tier 3: “Other” Income (Tax-Free Interest)

    Tier 4: Trust Principal (Also Tax Free)


Charitable Remainder Annuity Trust

  • With a CRAT, the annual distributions to the income beneficiaries is a percentage (not less than 5% or more than 50%) of the initial net fair market of the assets used to fund the trust

  • The payout is fixed and never changes, so if trust earnings are insufficient to meet the required amount, principal must be invaded

  • Attractive for older grantors as payout is certain

  • Additional contributions are not allowed


Charitable Remainder UniTrust

  • With a CRUT, the annual payout is variable, a percentage (not less than 5% or more than 50%) of the current fair market of the assets in the trust

  • Assets are revalued each year--if principal increases, the payout increases

  • Attractive for younger grantors

  • Contributions can continue

  • Three variations to a CRUT:

    • NI-CRUT (payout can be reduced to avoid invading principal)

    • NIM-CRUT (payout can be reduced to avoid invading principal, but is made up in subsequent payouts)

    • Flip CRUT (starts as NI-CRUT, flips to standard CRUT at specified date)


Charitable Lead Trusts

  • A charitable remainder trust in reverse

  • First, a charity receives an income stream for a specified term, or for the lifetime of the donor, or for the lifetimes of the donor and the donor’s spouse

  • Any income and principal remaining at the end of the term can revert back to the donor or to other non-charitable beneficiaries named in the trust

  • Transfer taxes if remainder interest passes to someone other than the donor and/or his/her spouse

    • Gift tax – on the net present value of the gift. Carry over basis for done

    • Estate tax – if assets transferred after donor’s death. Estate tax based on value the transfer date – any future appreciation is estate tax free. Assets receive a step up in basis

    • GST tax – if the remainder beneficiary is a skip person

  • Can either be a grantor lead trust or a non-grantor lead trust

    • Grantor Lead Trust – all trust income and expenses reported on the donor’s personal tax return. Donor may claim an income tax deduction for income that passes to charity (subject to AGI limits). Minimizing income taxes is the primary motive. Must be an inter vivos trust

    • Non-Grantor Lead Trust – this type of a CLT is a separate tax entity and hence all trust income and expenses are reported on the IRS Form 1041. The trust may deduct any payments to charity. Can be setup as either an inter vivos or as a testamentary trust

  • Larger deduction when the IRC § 7520 rate is low

Charitable Lead Annuity Trust - CLAT

  • A CLAT pays out a fixed amount each year based on the initial fair market value of the trust assets

  • Earnings and growth are added to the trust corpus, so each payment represents a smaller percentage of the total trust value

Charitable Lead UniTrust

  • A CLUT revalues trust assets annually and pays out an amount based on a specified percentage of that value

  • The actual payment from a CLUT varies from year to year