Charitable Remainder Trusts

Set Several options are available to you when you establish a charitable remainder unitrust.

First, a unitrust can be set up to benefit one person—such as the donor, a spouse or a child—or it may be established for two people—the donor and another person. Second, the trust can be established for the life of the beneficiary or for a term of years determined by the donor prior to the establishment of the trust. A term-of-years unitrust has a legal maximum length of twenty years.

There are many ways you can choose to fund your unitrust, including: cash, publicly traded stock, closely held stock, bonds (including tax-exempt bonds and zero coupon bonds), real estate and certain other assets.

Mr. and Mrs. Johnston, both 65 years old, own highly appreciated real estate valued at $200,000. They would like to sell the property and invest the proceeds to add to their retirement income. If the Johnstons sell their property, the Federal capital gains tax on the sale would be approximately $42,000, leaving them $158,000 or less to invest.

Instead, the Johnstons could place the $200,000 of real estate in a charitable remainder unitrust which could pay them 6%, or $12,000 income over their lifetimes. The trustee of the unitrust could sell the property with no capital gains tax due and invest the full $200,000. If the trust earns more than 6%, the extra income will be added to the principal and the 6% payments in the next year will be based on the increased value of the trust. This helps protect against the ravages of inflation.

The couple will receive an immediate income tax charitable deduction of $61,750. The deduction could be used up to 30% of adjusted gross income with a five-year carryover of any unused deduction. The $200,000 would be removed from their estate and the full gift of $200,000 would pass to Long Beach Rescue Mission Foundation, and any other organizations they have named, at the death of the surviving spouse.

The charitable remainder annuity trust is a similar type of trust which pays the beneficiary(ies) a fixed dollar amount (at least 5% of the original value of the trust’s assets) for life. Depending on the situation, an annuity trust does not allow assets to be added to the trust and is much more rigid than a unitrust agreement.