Charitable Remainder Trusts

Administration Building
Charitable remainder trusts are special trusts authorized by federal law. Legal entities unto themselves, they involve four parties: the donor, the life income beneficiary, the charitable beneficiary, and the trustee. There need not be any overlap among the four parties. In many cases, the first two parties are identical, as are the second two.

Charitable remainder trusts come in two types: annuity trust and unitrust. With either type, payments are made to one or more beneficiaries for either their lives, a term-certain not to exceed 20 years, or certain combinations of both.

The annuity trust pays a fixed sum based on the fair market of the assets transferred. Payments are made from income and, if necessary, from principal.

Distributions from a unitrust come first from income, then principal as necessary. The amount distributed is the product of a fixed percentage of at least five percent (5%) and the net asset value of the trust, as computed each year (‘unitrust amount”). The effect is that unitrust payments increase in years when the value has increased and decrease in years when it has decreased.

A unitrust may include a “net-income” provision that requires the trustee to distribute the lesser of the trust’s net income or the unitrust amount for the given year. A net-income unitrust may have a “make-up” provision that allows the trustee to reduce or eliminate accumulated payment deficiencies from prior years to the extent the net income of the trust exceeds the unitrust amount in the given year. Any net income not distributed is added to principal.

A hybrid form of the unitrust, known colloquially as a “flip” unitrust, initially functions as a net-income unitrust, with or without make-up provisions, then as a standard unitrust beginning in the trust year following the one in which a specified, prospectively determinable flip event occurs. The law does not define permissible flip events, but typical ones are the completion of a sale of property or a future date.

Typically, a flip unitrust is used when relatively illiquid, non- or low-income-producing property is used to fund a unitrust upon its creation. It can work with any asset, however. By law, accumulations in a deficiency account are forfeited at the time the trust begins operating as a standard unitrust.

Minimum gift amount: $100,000.

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