Charitable remainder trusts are becoming a popular way for people to give to their favorite charities. A charitable remainder trust is a trust in which noncharitable beneficiaries are given a life or term interest in property while the remainder interest is given to the donor's charity of choice. One of the things that make a charitable remainder trust so popular is that the donor can choose any number of people or organizations, including himself, to be the life or term beneficiary. When a donor establishes a charitable remainder trust, he will get a current income tax deduction equal to the amount of the remainder interest. In other words, a charitable remainder trust makes it possible for the donor to give properly to a charity, reap the benefits of the property during his life, and receive a current income tax deduction. There are two main types of charitable remainder trusts a donor can establish. They are charitable remainder annuity trusts (CRAT) and charitable remainder unitrusts (CRUT).

Charitable Remainder Annuity Trusts (CRAT)

A Qualified CRAT. A donor establishes a CRAT when he transfers property to a trust, chooses a person or persons to receive payments from the trust, and a charity to receive the remainder interest. To qualify, the payments must be a fixed amount and extend over the life of the payment beneficiary or for a term not over 20 years. The payment must be made at least annually and the amount cannot be less than 5% of the initial net fair market value of the trust or greater than 50% of the initial fair market value of the trust. Payments in excess of the fixed amount are prohibited unless they are to a charitable organization. Therefore, the trustee cannot be given the power to invade the principal of the trust or amend or revoke the trust in favor of a noncharitable beneficiary. When the payment beneficiary's interest is extinguished, the remainder of the trust must be transferred to the named charitable organization. The value of the remainder must be at least 10% of the initial fair market value of the trust. When a donor establishes a qualified CRAT, he is allowed a current income tax deduction equal to the amount of property placed in trust minus the present value of the trust's fixed payments based on the estimated life expectancy of the payment beneficiary.

Example: Person K transfers $500,000 to a CRAT in January 2000. Under the terms of the trust, K is to receive an annual fixed payment of $25,000 per year during her life. The remainder interest goes to charity. K is 60 years of age. The present value of the annual fixed payments over her life are $240,103. K will be allowed a $500,000 - $240,103 or $259,897 income tax deduction for the 2000 taxable year. The results would have been similar had K chosen someone else as the payment beneficiary. However, the younger the payment beneficiary, the greater the present value of the fixed payments and the smaller the current income tax deduction.

Charitable Remainder Unitrusts (CRUT)

A Qualified CRUT. A CRUT is very similar to a CRAT. One of the major differences is the amount required as annual payments to the payment beneficiary. A CRUT is required to make payments that are a fixed percentage of the fair market value of the trust assets valued annually. The fixed percentage must be 5% or greater but cannot exceed 50%. The amount of the payment may fluctuate each year because the fair market value of the trust assets may fluctuate each year. A CRUT can also make payments in the amount of the trust's net income in the event the net income is less than the fixed percentage. In addition, a CRUT can make payments in excess of the fixed percentage limited to the extent it made prior payments less than the fixed percentage. The amount of the donor's current income deduction is equal to the estimated future value of the interest the charity will receive.

Example: Person D transfers $500,000 to a CRUT in January 2000. Under the terms of the trust, D's 40 year old daughter, B, is to receive annual payments equal to 5% of the value of the trust during her life. The remainder interest goes to charity. The estimated future value of the remainder interest is $90,885. D will get an income tax deduction of this amount for the 2000 taxable year. NOTE: The main reason why this deduction is significantly less than the deduction in the CRAT example is because the payment beneficiary in the this example is 25 years younger, making the charity's future interest less valuable. Note, however, that D has made a gift to B of $409,115, the present value of B's income interest.

Other Benefits of Charitable Remainder Trusts

Charitable remainder trusts can play a significant role in minimizing the tax liability owed on property with a substantial inherent gain while maximizing the property's income potential and receiving a tax deduction in the process. For example, suppose person G, who is 55 years old, holds stock with a current value of $1,100,000 and a basis of $100,000. If G sold the stock, he would be facing a $1,000,000 capital gain which in turn would yield a $200,000 tax liability. After paying the tax, he would have $900,000. If he reinvested the money in an asset that paid him 10% annually, he would receive $90,000 a year. Instead, suppose G transferred the stock to a CRUT paying him 10% annually during his life with the remainder going to charity. The CRUT could sell the stock and pay no capital gain tax since the CRUT is exempt from income tax. The CRUT would have $1,100,000 to invest versus $900,000 if G sold the stock and reinvested it himself. G would receive $110,000 a year as opposed to $90,000 a year and get a tax deduction of $155,474!

Finally, let us not forget who benefits most from charitable remainder trusts: the charities and the causes they support. Every year thousands of charities receive remainder interests from charitable remainder trusts. This money allows them to grow, prosper, and carry on their charitable works that make this world a better place. If a person is considering donating to charity, he should consider establishing a charitable remainder trust.

Irrevocable Life Insurance Trusts (I LIT) are used to reduce the value of an individual's estate and continue to provide to the insured's surviving family all the benefits of life insurance. If the ILIT is named as the beneficiary of the life insurance policy, the proceeds will generally not be included in the estate of the settlor (the person creating the trust) or the estate of the insured. The trust may provide for the support of the settlor's surviving spouse or children after the settlor's death. The insurance proceeds may still be made available to the settlor's estate by giving the trustee the power to make loans to the estate or to purchase illiquid assets from the estate.

If the ILIT is funded with existing life insurance policies and the transferor dies during the three years following the contribution, the Internal Revenue Code includes the insurance proceeds in the transferor's gross estate. If the trustee of the I LIT purchases the insurance policy, the settlor does not have to survive three years.

The transfer of an existing policy is treated as a gift to the trust beneficiaries of the value of the policy. The gift tax consequences of funding an I LIT and contributing money to pay policy premiums can be minimized by giving the trust beneficiaries a limited right to withdraw contributions to the trust. If the trust permits additional contributions to the trust, the settlor may annually contribute money to the trust to pay the policy premiums. The contributions will qualify for the gift tax annual exclusion to the extent the beneficiaries have a right to withdraw up to $10,000 per donee of assets from the trust. The beneficiaries' right to withdraw may be limited in duration, usually thirty to forty-five days.

An ILIT must be carefully drafted to ensure the proceeds are excluded from the estate of the settlor. The settlor must give up all incidents of ownership with regard to the insurance policies. If the settlor retains any control over the policy, the policy will be included in his estate and subject to the estate tax. For example, the settlor should not reserve the power to be trustee, to appoint or remove the trustee, to name beneficiaries of the life insurance policy, or to alter or revoke the trust agreement.