Charitable Remainder Trusts

Donor Benefits:

• Can pay income to multiple parties or groups

• Charitable deduction for gift value

• Income for life

• Avoidance of capital gains tax

• Reduction of estate tax

With a charitable remainder trust, the donor irrevocably transfers assets into a trust (modeled after documents approved by the IRS. Patronato can provide you with example documents). The donor (called the grantor) continues to use the property and/or receive income from it while living. (The payments may not exceed 50 percent of the initial amount contributed, and the present value of the amount that will eventually pass to the charity.)

The beneficiaries receive the income and the charity receives the principal after a specified period of time. The grantor avoids any capital gains tax on the donated assets, and also gets an income tax deduction for the fair market value of the remainder interest that the trust earned.

In addition, the asset is removed from the estate, reducing subsequent estate taxes. The donor usually names a bank or trust company of his or her choice to serve as trustee to invest the funds, pay the income, prepare the annual tax reporting forms, and, when the last income beneficiary (recipient) dies, distribute the remainder (remaining assets in the trust) to the charity named.

Trust income is fully taxable to the beneficiary (or beneficiaries) unless the trust is invested entirely in tax-exempt bonds.

Because of the legal expense required to draft a trust instrument (the cost of which can be defrayed by the donor’s tax savings), the charitable remainder trust is more suitable for large gifts ($100,000 and more). There are three variations on the charitable remainder trust: (1) annuity trusts, (2) unitrusts, and (3) net income trusts.