Charitable Remainder Trust FAQs

A charitable remainder trust is a tax-exempt trust to which a donor may transfer assets and receive a charitable deduction and income for the term of the trust. The contributed assets are invested for the trust term. At the end of the trust term, the remaining assets of the trust, the “remainder”, are distributed to a qualified section 501(c)(3) charity. The term of a charitable remainder trust may be for the lives of the named income beneficiaries or for a term of years, not to exceed 20 years. A charitable remainder trust is tax-exempt unless it receives unrelated business taxable income during the year. Charitable remainder trusts have their own Internal Revenue Code section, section 664.

There are several charitable remainder trust formats distinguished by the payout format.

A charitable remainder annuity trust pays the income beneficiaries of the trust a fixed amount each year. This amount is not subject to change during the term of the trust, regardless of the investment performance of the trust. A charitable remainder annuity trust may not receive additional contributions.

A charitable remainder unitrust pays the income beneficiaries of the trust a fixed percentage of the trust’s value as redetermined annually. A charitable remainder unitrust may receive additional contributions. A charitable remainder unitrust also may be referred to as a standard payout charitable remainder unitrust.

A net income charitable remainder unitrust pays the income beneficiaries of the trust the lesser of (i) a fixed percentage of the trust’s net fair market value of the trust assets as redetermined annually, and (ii) the trust’s net income.

Net income with make-up charitable remainder unitrust; like a net income charitable remainder unitrust, a net income with make-up charitable remainder unitrust pays the income beneficiaries of the trust the lesser of (i) a fixed percentage of the trust’s net fair market value of the trust assets as redetermined annually, and (ii) the trust’s net income. In addition, the trust accumulates any shortfall (i.e., amount by which the fixed percentage amount exceeds the net income) for distribution in future years when the trust’s net income exceeds the fixed percentage amount. The accumulated shortfall is known as the “make-up” amount.

A flip charitable remainder unitrust is a hybrid combination of a net income with make-up charitable remainder unitrust (or net income charitable remainder unitrust) and a charitable remainder unitrust. A flip charitable remainder unitrust begins its existence as a net income with make-up charitable remainder unitrust and upon the happening of a pre-defined triggering event, the trust’s payout method changes to the fixed percentage payout of a charitable remainder unitrust.

Note: The “net income” and “make-up” provisions are only available to charitable remainder unitrusts. They are not available to charitable remainder annuity trusts

A charitable remainder annuity trust is a tax-exempt trust from which a fixed amount is paid to one or more persons, at least annually. This fixed amount may not be changed once the trust is funded. The fixed amount may not be less than five percent nor more than 50 percent of the value of the initial contribution to the charitable remainder annuity trust. The term of a charitable remainder annuity trust may be for the lives of the named income beneficiaries or for a term of years, not to exceed 20 years. Additional contributions to a charitable remainder annuity trust are prohibited. At the expiration of the charitable remainder annuity trust’s term, the remaining assets of the trust, the “remainder”, are distributed to a qualified section 501(c)(3) charity. Because a charitable remainder annuity trust’s fixed amount may not be changed once the trust is funded, it is best suited for older income beneficiaries for whom the loss of purchasing power over time is not an issue.

A charitable remainder unitrust is a tax-exempt trust from which a fixed percentage of the net fair market value of the charitable remainder unitrust’s assets (redetermined annually) is paid to one or more persons, at least annually. In the event the income and realized gains from the trust are insufficient to pay the required distribution, a charitable remainder unitrust must distribute the principal of the trust. The product of the fixed percentage and the net fair market value of the charitable remainder unitrust’s assets is known as the “unitrust amount” or “fixed percentage amount.” The fixed percentage may not be less than five percent nor more than 50 percent. The fixed percentage may not be changed once the trust is funded.

The term of a charitable remainder unitrust may be for the lives of the named income beneficiaries or for a term of years, not to exceed 20 years. Additional contributions may be made to a charitable remainder unitrust if the trust’s governing document permits. At the expiration of the charitable remainder unitrust’s term, the remaining assets of the trust, the “remainder”, are distributed to a qualified section 501(c)(3) charity.

A net-income charitable remainder unitrust is a tax-exempt trust to which the trust’s income beneficiaries are paid the lesser of (i) a fixed percentage of the trust’s net fair market value of the trust assets as redetermined annually, and (ii) the trust’s net income. The product of the fixed percentage and the net fair market value of the net-income charitable remainder unitrust’s assets is known as the “unitrust amount” or “fixed percentage amount.” The fixed percentage may not be less than 5 percent nor more than 50 percent. The fixed percentage may not be changed once the trust is funded.

The term of a net-income charitable remainder unitrust may be for the lives of the named income beneficiaries or for a term of years, not to exceed 20 years. Additional contributions may be made to a net-income charitable remainder unitrust if the trust’s governing document permits. At the expiration of the net-income charitable remainder unitrust’s term, the remaining assets of the trust, the “remainder”, are distributed to a qualified section 501(c)(3) charity. A net-income charitable remainder unitrust is often used when the trust is initially funded with an illiquid asset that is not readily converted to cash.

A net-income with make-up charitable remainder unitrust is a tax-exempt trust to which the trust’s income beneficiaries are paid the lesser of (i) a fixed percentage of the trust’s net fair market value of the trust assets as redetermined annually, and (ii) the trust’s net income. In addition, the trust accumulates any shortfall (i.e., amount by which the fixed percentage amount exceeds the net income) for distribution in future years when the trust’s net income exceeds the fixed percentage amount. The accumulated shortfall is known as the “make-up” amount. The product of the fixed percentage and the net fair market value of the net-income with make-up charitable remainder unitrust’s assets is known as the “unitrust amount” or “fixed percentage amount.” The fixed percentage may not be less than 5 percent nor more than 50 percent. The fixed percentage may not be changed once the trust is funded.

The term of a net-income with make-up charitable remainder unitrust may be for the lives of the named income beneficiaries or for a term of years, not to exceed 20 years. Additional contributions may be made to a net-income with make-up charitable remainder unitrust if the trust’s governing document permits. At the expiration of the net-income with make-up charitable remainder unitrust’s term, the remaining assets of the trust, the “remainder”, are distributed to a qualified section 501(c)(3) charity. A net-income with make-up charitable remainder unitrust is often used when the trust is initially funded with an illiquid asset that is not readily converted to cash.

A flip charitable remainder unitrust is a hybrid combination of a net-income with make-up charitable remainder unitrust (or a net-income charitable remainder unitrust) and a charitable remainder unitrust. See the questions “What is a net-income with make-up charitable remainder unitrust?”, “What is a net-income charitable remainder unitrust?”, and “What is a charitable remainder unitrust?” for a description of these charitable remainder trust formats. A flip charitable remainder unitrust begins its existence as a net-income with make-up charitable remainder unitrust or net-income charitable remainder unitrust and converts (or “flips”) to a charitable remainder unitrust upon the happening of a triggering event. The payout structure changes on January 1 of the year following the year in which the triggering event occurs.

By regulation there are seven permissible triggering events:

1. The sale of an unmarketable asset;
2. A date certain;
3. A birth;
4. A death;
5. A marriage;
6. A divorce; or
7. An event outside the control of any person.

The triggering event must be stated in the trust’s governing document and may not be altered once the trust is funded.

The term of a flip charitable remainder unitrust may be for the lives of the named income beneficiaries or for a term of years, not to exceed 20 years. Additional contributions may be made to a flip charitable remainder unitrust if the trust’s governing document permits. At the expiration of the flip charitable remainder unitrust’s term, the remaining assets of the trust, the “remainder”, are distributed to a qualified section 501(c)(3) charity. A flip charitable remainder unitrust is often used when the trust is initially funded with an illiquid asset that is not readily converted to cash.

Yes, an income tax deduction is allowed for a contribution to a charitable remainder trust. However, the allowed deduction is discounted to reflect the fact that the charitable recipient will not receive its share of the trust for many years in the future. This discounted value is referred to as the “present value of the remainder interest.”

Yes, a gift tax deduction is allowed for a contribution to a charitable remainder trust. However, the allowed deduction is discounted to reflect the fact that the charitable recipient will not receive its share of the trust for many years in the future. This discounted value is referred to as the “present value of the remainder interest.”

Yes, an estate tax deduction is allowed for a testamentary contribution to a charitable remainder trust. However, the allowed deduction is discounted to reflect the fact that the charitable recipient will not receive its share of the trust for many years in the future. This discounted value is referred to as the “present value of the remainder interest.

Whether computing an income tax deduction, a gift tax deduction, or an estate tax deduction, a number of factors are used to compute the amount of the deduction. Specifically (i) the type of charitable remainder trust, (ii) the ages of the trust’s income beneficiaries or term of years, (iii) the trust’s payout rate, (iv) the frequency of payments to the income beneficiaries, and (v) a discount rate published monthly by the Internal Revenue Service. The monthly discount rate published by the Internal Revenue Service is commonly known as the Applicable Federal Rate (AFR).

Yes. The tax code limits the use of an income tax deduction to a percentage of the donor’s adjusted gross income (AGI). Unused deduction amounts may be carried forward for an additional five years.

Important: The rules regarding the use of the income tax charitable deduction are complex. It is strongly recommended that you discuss the use of the income deduction with your tax advisor.

A donor that creates a charitable remainder trust receives a number of benefits including:

– The avoidance of capital gains on the contribution of appreciated assets;
– A current income tax deduction;
– Increased cash flow (in current years or future years);
– The opportunity to benefit the charity or charities of the donor’s choice;
– The ability to diversify a concentrated asset position and reduce investment risk;
– The reduction of the donor’s taxable estate; and
– An exit strategy from certain types of business endeavors such as owning and managing rental properties.

A charitable remainder trust is ideal for clients that want or need:

• – A current income tax charitable deduction;
• – To avoidance of capital gains tax on the sale of an appreciated asset;
• – The tax-advantaged diversification of a concentrated portfolio; and
• – Immediate cash flow.

Yes, a charitable remainder trust must file the following forms:

IRS Form 5227, Split-Interest Trust Information Return
Filed with the Internal Revenue Service.  This form is due by April 15 and may be extended to July 15 and October 15.

IRS Form Schedule K-1, Beneficiary’s Share of Income, Deductions, Credits, etc.
Mailed each year to the trust’s income beneficiaries.  It must be mailed by the due date of Form 5227.

IRS Form 8282, Donee Information Return
This form is required to be filed if the charitable remainder trust sells an unmarketable asset within three years of the contribution date and the donor files Form 8283, Non-cash Charitable Contributions with his or her individual income tax return.

IRS Form 4720, Return of Certain Excise Taxes Under Chapters 41 and 42 of the Internal Revenue Code
This form is required to be filed if the charitable remainder trust must pay the excise tax on unrelated business taxable income or engages in a prohibited act of self-dealing.

State Trust Income Tax Forms
Some states require that a charitable remainder trust file an income tax return with the state taxing authority, even though the trust is exempt from tax.  In addition, two states, New Jersey and Pennsylvania, do not recognize a charitable remainder trust as a tax-exempt trust. However, not all states require that a charitable remainder trust file a state trust income tax return.

State Charitable Registration Forms
Some states require that a charitable remainder trust register its existence with the state Attorney General and file an annual report with the state Attorney General.

The annual valuation date on which a charitable remainder trust’s net assets are valued should be defined in the trust’s governing document. The most common date on which the net fair market value of a charitable remainder trust’s assets is determined in the first business day of the calendar year. However, the trust’s governing document may specify that the net assets are to be valued on any date during the taxable year, or by taking the average of valuations made on more than one date during the taxable year of the trust. Whatever method is selected, the same valuation date(s) and methods must be used consistently each year.

The choice of charitable remainder trust format depends upon a thorough analysis of a number of factors, including:

• – The type of assets funding the trust
• – The tax rate applicable to the appreciation in the assets funding the trust (e.g., ordinary income rates or capital gain rates)
• – The age and investment temperament of the income recipient(s)
• – The recipient’s income needs
• – The donor’s goals regarding the size of the ultimate charitable gift
• – A realistic assumed rate of return on the trust’s assets
• – The liquidity (or illiquidity) of the funding asset

Important: A key consideration in the choice of trust format, is the liquidity of the funding asset. Failure to make a required distribution may result in a prohibited act of self-dealing, the realization of unrelated business income, and/or the disqualification of the trust. For example, funding a charitable remainder annuity trust or charitable remainder unitrust with an illiquid asset may create challenges if the illiquid asset doesn’t sell prior to the end of the year in which the trust was funded. This is because the charitable remainder annuity trust or charitable remainder unitrust will lack the cash necessary to make its required distribution.

Some common forms of measuring terms for a charitable remainder trust are:

Life only – The trust makes payments to one or more named individuals as long as one individual is alive.

Term of years– The trust makes payments to one or more persons for a period not to exceed 20 years.

The longer of life and concurrent term of years – The trust makes payments for a guaranteed term (not to exceed 20 years) that is concurrent with the life span of one or more individuals. For example, the trust could pay income to an individual for the life of that individual or for a period of 14 years, whichever is longer. If the individual dies within the first 14 years, income will be distributed to the individual’s estate or named individuals for the balance of the original 14 year period.

The Shorter of Life and Concurrent Term of Years – The trust makes payments for the shorter of a term of years (not to exceed 20 years) or the life span of the measuring life. For example, the trust could pay income to an individual for a period of 20 years however, if the individual dies during that 20-year period, all payments stop and the remainder interest then passes to the charitable beneficiary.

Lives Followed by the Shorter of Lives or a Term of Years – The trust makes payments to an initial group of named recipients for the balance of their lives. At their deaths, the trust continues to make income payments to a new group of recipients whose income term is measured by the shorter of their lives or a term of years not to exceed 20.  If the second class of recipients dies before the expiration of the term of years (in this example 20), the trust terminates.

Planning Caution: It is important that every life recipient is specifically identified when the charitable remainder trust document is created.

The flip charitable remainder unitrust during its initial phase and the net income charitable remainder unitrust, with or without a make-up provision, are particularly suitable for income deferral because distributions from these types of trust are limited to the net income as determined under state trust law principles.  This net income is known as “trust accounting income” (TAI) or “fiduciary accounting income” (FAI).  Income deferral is achieved in a flip charitable remainder unitrust or net-income with make-up charitable remainder unitrust by careful drafting to support an investment plan that minimizes the realization of TAI. In later years when distributions are desired, the investment portfolio is repositioned to invest in assets which do produce TAI.

One common means of achieving income deferral is the use of commercial deferred annuities to control the timing and amount of TAI.  Our consultants are available for questions surrounding the special rules that should be considered when investing in commercial deferred annuities.

It is not possible to achieve income deferral with either a charitable remainder annuity trust or a charity remainder unitrust because these trust formats are required to make distributions, at least annually, to the income beneficiaries.

A trustee’s typical responsibilities include:

– valuing trust assets

– selling contributed assets when prudent

– computing the annual unitrust amount

– receiving and disbursing income

– accounting under the unique charitable remainder trust four-tier system

– filing fiduciary tax and information returns

– maintaining the trust’s tax-exempt status

– holding and managing trust assets, and

– communicating with and reporting to a charitable remainder trust’s income beneficiaries

The timelines below are merely guidelines. Your financial institution may or may not be able to complete the transaction faster. We will make every effort on our part to help the donor receive a 2018 deduction and we know that some financial institutions will be able to complete certain transactions after some of these dates. Please note that since we do not control the transfer of assets, the actual timing of most gifts depends primarily on the actions of the donor’s agents. The donor or the donor’s advisor must initiate and complete the transfer to Renaissance Charitable Foundation Inc. during 2018.

Check or Money Wire – The check is payable to Renaissance Charitable Foundation and must be postmarked no later than December 31st, 2018 to receive the 2018 charitable deduction.

Securities donated by DTC – Securities must be received into Renaissance Charitable Foundation’s accounts no later than December 31st, 2018 to receive the 2018 charitable deduction.

Mutual Funds – Due to the length of time it takes to transfer a mutual fund, any mutual fund gift received after November 15th can not be guaranteed to settle before year-end. Be sure to contribute your mutual fund gifts prior to this date to ensure receipt of the asset and receive the 2018 charitable deduction.