For high net-worth individuals and couples, there are a variety of transfer techniques in order to minimize exposure to death taxes. These include, but are not limited to Disclaimer Trusts, Credit Shelter Trusts, Applicable Exemption Trusts (a/k/a Credit Shelter Trusts), and Q-TIP Trusts. These Trusts, effective for use with married couples, can be utilized in Wills and Revocable Living Trusts. To further minimize potential payment of estate and inheritance taxes, a variety of other techniques may be employed. This is the third and final installment of a guide on charitable planning.
C. CHARITABLE REMAINDER TRUSTS
Charitable Remainder Trusts are practically the opposite of Charitable Lead Trusts. Both are split interest vehicles. However, the initial beneficiary of the Trust is the donor and/or his or her family in the Remainder Trust, whereas in the Lead Trust, it is the charity itself. As a result, in the Lead Trust, the family is the remainder beneficiary. In a Remainder Trust, one or more charitable organizations is the remainder beneficiary.
A remainder interest in a Trust is deductible if the Trust takes one of three forms: Charitable Remainder Annuity Trust, Charitable Remainder Unitrust or a Pooled Income Fund. A Charitable Remainder Annuity Trust is authorized under Section 664(d)(1). It is an Irrevocable Trust in which a fixed amount is paid at least annually to one or more persons for a term of years or for life. The fixed amount must be a sum certain not less than 5% or more than 50% of the initial net fair market value of the Trust. The lead beneficiary (or if there is more than one, at least one of said beneficiaries) must not be a permissible donee of a charitable contribution listed in Section 170(c). If a term of years is utilized, it must not exceed 20.
Individuals, who will receive payments from a Charitable Remainder Annuity Trust must be living at the creation of said Trust. No other payments may be made other than to or for the use of an organization qualified under Section 170(c).
At the termination of the fixed amount payments, the remainder must be distributed to or for the use of a charitable organization or held for the benefit of such an organization. The Trust may have one or more remainder beneficiaries that are charities. All remainder beneficiaries must be charities.
In order to qualify for a charitable deduction, the present value of the remainder interest must be at least 10% of the initial fair market value of the property contributed to the Trust. This requirement applies to all Charitable Remainder Trusts established after July 28, 1997.
A Charitable Remainder Unitrust is an irrevocable Trust from which a fixed percentage is paid at least annually to one or more persons for a term of years or for life. The requirements as to percentage, lead beneficiaries and term are the same as with a Charitable Remainder Annuity Trust. As with a Charitable Remainder Annuity Trust, individuals receiving payments, from a Charitable Remainder Unitrust, must be living at the creation of the Trust. The 10% rule also applies.
The difference of a Charitable Remainder Unitrust is that this type of Trust may pay annually to the income beneficiary income if it is less than the fixed percentage amount rather than the fixed percentage mandated by the Charitable Remainder Annuity Trust. In addition, if income is greater than the fixed percentage amount, that income may also be paid to the income beneficiary to the extent that the aggregate Charitable Remainder Unitrust income in prior years was less than the aggregate fixed percentage amounts (A Charitable Remainder Unitrust with these net income and “makeup" provisions is often referred to as a NIMCRUT.)
An alternative to the Charitable Remainder Trust is a Pooled Income Fund. It is also referred to as a “Poor Man’s Trust" or a “No Trust Trust". It is an irrevocable Trust in which multiple donors transfers property, retaining an income interest an contributing an irrevocable remainder interest to a charitable organization listed in Section 170(b)(1)(A). Private foundations and public charities, which support other public charities or which receive more than one-third of their support from memberships, admissions fees, grants and gifts and less than one-third from investment income are excepted. The income interest retained by the donors is for the life of one or more income beneficiaries living at the time of the transfer. The income interest is also paid at the rate of return actually earned by the Trust itself. Whereas the aforementioned Charitable Lead Trusts and Charitable Remainder Trusts may be maintained by an individual or financial institution as Trustee, a Pooled Income Fund is maintained by the charitable organization that will receive the remainder interest. See section 642(c)(5).
One interesting facet of a Charitable Remainder Trust is that a Grantor can also serve as Trustee. Typically, any Trust, in which a Grantor can also serve as Trustee will be referred to as a Grantor Trust and have no significant estate or gift tax benefit. However, an important exception is made for the Charitable Remainder Trust. In doing so, a Trust can make investments consistent with the Grantor’s plans. However, in doing so, the Grantor, in his or her capacity as Trustee, must balance the goal of investment control with the fiduciary duty owed to the charitable remainderman. Morever, a Grantor, who serves as Trustee, must be certain that no powers are retained which would cause the Trust to be subject to the Grantor Trust rules of Sections 671-678. Otherwise, the Trust will be considered a Grantor Trust and will not qualify as a Charitable Remainder Trust. Typically, the type of assets, which can be contributed to Charitable Remainder Trusts, is unlimited. However, in the aforementioned event when the Grantor is also the Trustee, the Trust interest must hold clearly identifiable assets. Real estate, stock in closely held companies, and personal effects are often difficult to value, and could disqualify a Trust for the Grantor’s charitable deduction.
Upon the death of a Grantor, the estate tax deduction for the Charitable Remainder Annuity Trust will equal the actual or fair market value of the remainder interest of the Trust. It is determined by taking the fair market value of the property placed in the Trust and reducing it by the present value of the non-charitable annuity interest. These values are to be determined as of the Decedent’s date of death or by the alternate valuation date.
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