Nancy StorkUniversity of Dayton
300 College Park
Dayton, OH 45469-2964
Charitable Remainder Trusts
The charitable remainder trust is similar to other types of trusts except that the amount distributed at its termination (the remainder) is paid to a charitable beneficiary. A donor transfers property irrevocably to a trust and specifies the amount of payments to be distributed, to whom the payments are to be paid, the duration of the payments (a period of years of the lifetime of the beneficiaries), and the charity that will receive the remainder.
This plan may become effective through outright transfers during the donor’s lifetime or through transfers at death under the donor’s will. To qualify for the charitable deductions available under federal tax law, the plan must conform to the requirements of a charitable remainder unitrust or charitable remainder annuity trust. Each of these arrangements offers independent features that can be used effectively to achieve financial and estate planning objectives.
Funding a charitable remainder trust with appreciated, long-term, capital gain securities can increase the available tax benefits because the grantor can avoid the potential capital-gain tax that would result from an outright sale of the property. Avoidance of the capital-gain tax, coupled with a current charitable income-tax deduction can substantially reduce the cost of such a transfer.
The primary feature of the unitrust is that it provides for payment to the beneficiary of an amount that may vary over time. The payment must equal a fixed percentage of the net fair-market value of the trust assets, as valued annually. The grantor determines the fixed percentage upon creation of the unitrust; it must be at least 5%. Depending upon a donor’s financial planning objectives, a choice may be made to emphasize the charitable deduction (by choosing a lower rate) or the annual return (by selecting a higher rate.)
The unitrust payment must be made at least annually to the current beneficiary, but may be made at more frequent intervals, such as semi-annually or quarterly. The unitrust may be set up for the lives of the beneficiaries or for a term of years not to exceed 20. The amount paid to beneficiaries each year is determined by multiplying the payout rate by the value of the trust assets. The variable nature of the unitrust payments may provide a hedge against inflation – assuming a growth in value of the trust assets comparable to the inflation rate.
The unitrust can be funded with cash or with long-term, highly appreciated, capital gain securities or real estate. Additional contributions are permitted.
The annuity trust shares many common features with the unitrust, the principal difference being the manner of calculating the payment to the beneficiary. While the unitrust provides for a payout that may vary, the annuity trust provide for a fixed payout. This amount must equal a sum certain of not less than 5% of the initial fair-market value of the gift in trust. An annuity trust cannot accept additional contributions.
A deduction for the present value of the charitable remainder interest and the avoidance of capital-gain tax on the transfer of appreciated, long-term, capital-gain property are among the benefits available to the grantor of the annuity trust. The fixed payout feature of the annuity trust may make it particularly suitable to meet the needs of a beneficiary looking for a steady payment stream.
Who Can Serve as Trustee?
The University of Dayton acts as Trustee for a number of charitable remainder trusts in which the University is the ultimate charitable beneficiary.