Charitable Remainder Trust

This trust makes payments, either a fixed amount (annuity trust) or a percentage of trust principal (unitrust), to whomever the donor chooses to receive income. The donor may claim a charitable income tax deduction and may minimize any capital gains tax if the gift is of appreciated property.  At the end of the trust term, the charity receives whatever amount is left in the trust.  Charitable Remainder Uni-Trusts (CRUT - paying a fixed percentage) may provide some flexibility in the distribution of income, and thus can be helpful in retirement planning, while Charitable Remainder Annuity Trusts (CRAT - paying a fixed dollar amount) are more rigid and restrictive.

Suppose you would like a life income determined by a percentage of the fair market value of a trust you create with assets you choose. A fixed percentage is agreed upon at the outset, and your income for each year is calculated by multiplying this rate by the latest annual valuation of the investment portfolio of the trust.

Example: Fred, 62, contributes $100,000 in cash to a unitrust, arranging to receive 6% of the fair market value of the unitrust assets each year, payable quarterly. The first year he is entitled to $6,000 (6% of $100,000). At the time of the second valuation, the unitrust portfolio is worth $110,000. For that year Fred is paid $6,600 (6% of $110,000). If the trust value had decreased to $90,000 at the time of the second valuation, Fred would have received $5,400 (6% of 90,000). In each subsequent year, the same process is followed. In the year he creates the unitrust, Fred is entitled to an income tax charitable deduction of $36,849 (deductible up to 50% of his adjusted gross income). If necessary, he has an additional five years to use up the deduction.