Charitable Remainder Trusts
A trust is established when assets are transferred to a trustee to be held on behalf of specified beneficiaries during the trust term. A charitable remainder trust is a trust that pays (to the donor and/or another beneficiary) an amount of money for the beneficiary’s life or for a fixed term, not to exceed 20 years. The remainder is then paid to GCF for a fund that has been set up according to the donor’s wishes or to establish an unrestricted fund at GCF to provide funding for competitive grant requests made by the community.
Charitable remainder trusts offer a great deal of flexibility and tax advantages to the donor. When a charitable remainder trust is established, the donor receives an income tax deduction for the charitable portion of the trust (present value of GCF’s interest in the trust after the income beneficiary’s death). The income beneficiaries also receive a stream of income for the term of the trust.
A charitable remainder annuity trust (CRAT) provides fixed dollar payments and is particularly suitable for a donor who needs the security of a fixed annual income. The annuity payments are based on the value of the trust at inception.
For example, Paul and Meg Brie are ages 75 & 76. They don’t like stock market fluctuations that may impact their income. They decided to set up a $250,000 CRAT using appreciated stock. They choose an annuity rate of 6% providing an annual income stream of $15,000. Paul and Meg avoid any immediate capital gains on their gift and get a charitable income tax deduction of $91,240 that may be used to offset ordinary income for up to six years. After their lifetimes, the remaining portion in the trust will establish The Brie Family Fund at The Greater Cincinnati Foundation to benefit charities identified by the family.
Estate Planning tip:
Sometimes families use the increased income from their charitable trust to purchase life insurance to create a wealth replacement trust to “replace” the assets from their estate that they used to fund charitable remainder trusts. The life insurance is held in an irrevocable trust that passes directly to heirs, estate-tax free after the donor’s lifetime.
A charitable remainder unitrust (CRUT) requires an annual payout equal to a specified percentage (at least five percent) of the annual value of the trust’s assets. A charitable remainder unitrust can provide a hedge against inflation if the value of the trust’s assets increases over time. A charitable remainder unitrust (CRUT) may be suitable for a donor who would like the flexibility of selecting a payout rate and of being able to add to the trust in the future.
For example, Mary Smith, age 65, transfers $200,000 to a CRUT and names GCF as the charitable beneficiary. Mary elects to receive 7% of the fair market value of the unitrust assets each year. Mary receives $14,000 (7% of $200,00) in the first year. During the year the trust assets appreciate in value to $220,000, so in the second year, Mary is paid $15,400 (7% of $220,000). Each subsequent year the same valuation process is followed. Mary also receives an income tax deduction of $71,452 in the year the trust is funded and the assets are removed from her taxable estate. After Mary’s lifetime, the remaining assets in the trust create an endowed fund at The Greater Cincinnati Foundation to benefit the community where Mary lived.
If you would like to talk about how a charitable trust may benefit your family and your community, contact a member of the Giving Strategies Group at The Greater Cincinnati Foundation for a charitable trust illustration. Professional advisors can run an illustration through the Planned Giving Design Center.
The Foundation Society recognizes people who have remembered GCF with a bequest in their will or other type of personal gift. For more information see:The Foundation Society: Recognizing Legacies.
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