A charitable remainder trust allows you to make a contribution to charity while retaining an interest in the gift or transfer and receiving a charitable deduction for the assets ultimately passing to the charitable organization. A charitable remainder trust must provide for payment of either an annuity amount or a unitrust amount (a percentage of the value of the trust each year) to specified non-charitable beneficiaries during their lifetimes or for a period not to exceed 20 years with the remainder passing to charitable organizations as defined under Section 170 (c) of the Internal Revenue Code of 1986, as amended (the "Code"). The annuity amount must equal at least 5%, but not in excess of 50%, of the initial value of the assets passing into the trust and the unitrust amount must be at least 5%, but not in excess of 50%, of the value of the assets as determined on an annual basis. A unitrust may pay the lesser of the net income of the trust and the unitrust amount annually and also contain a "make-up" provision allowing the use of excess income in later years to make up any deficiencies in the distribution of the actual unitrust amount in previous years. Further, the charitable remainder interest must be worth at least 10% of the value of the assets being transferred to the charitable remainder trust.
With respect to a charitable remainder trust created during one's life, the grantor of the trust is entitled to a charitable income and gift tax deduction for the fair market value of the remainder interest of the trust. To the extent any of the beneficiaries of the annuity or unitrust amounts are other than the grantor, then the value of the interest is subject to gift tax. If the non-charitable beneficiary is the grantor's spouse, then the marital deduction is allowed under Section 2523(a) of the Code [see Section 2523(g) of the Code]. At the death of the grantor (or at the death of the grantor's spouse), when all non-charitable interests terminate, and the assets pass to the charitable remainder beneficiaries, an estate tax deduction is allowed for the value of those interests passing to charity under Section 2055 of the Code.
A charitable remainder trust is not subject to any income tax unless it has unrelated business income. Thus, if you are nearing retirement age and the funds contained in your existing retirement plan are inadequate for your future retirement needs, and if you hold any low basis assets outside your retirement plan funds, you have the opportunity of transferring those low basis assets to a charitable remainder trust and liquidating those assets to allow for a diversification of the proceeds into higher income yielding assets, without incurring any capital gains tax. As the grantor of the trust, you can retain an interest in the trust for your life in an annuity amount or unitrust amount as described above, to enhance the amounts distributed from your retirement plan. As assets are distributed from the charitable remainder trust, you would be taxed on those distributions in accordance with a tier system of income taxation.
Further, as mentioned above, you would be entitled to a charitable deduction for the contribution of the assets to the charitable remainder trust equal to the value of the remainder interest which would ultimately pass to charity. There are certain limits to the taking of a charitable deduction in any one calendar year depending upon whether the charitable organizations are a public or private foundation, whether the type of property contributed is long-term capital gain property and the amount of your adjusted gross income in any one taxable year. The deduction ceiling is generally 50% of a taxpayer's adjusted gross income. If long term capital gain property is contributed to a charitable remainder trust, the deduction ceiling would be 30% of the taxpayer's adjusted gross income. However, the taxpayer may make use of a charitable deduction carry-forward which is available for use in future taxable periods.
Under a charitable remainder trust, because the property will ultimately pass outside the family to charitable organizations, there may be a need to replace the funds lost to the family with life insurance on the grantor's life (or a combination of the lives of the grantor and the grantor's spouse). If you have achieved an enhancement of income from a charitable remainder trust as described above, some of this excess income can be utilized in the payment of premiums on life insurance which will mature at the termination of the charitable remainder trust and pass an equivalent amount of assets to family members without incurring additional estate tax. This can be achieved by creating an irrevocable life insurance trust which will own the policies of life insurance which are being used to replace the wealth loss. If the insured holds no incidents of ownership in the policies, then the proceeds of the insurance policies will not be included in the taxable estate of the insured. Further, the amount passing to the insured's heirs could actually be greater than the amounts passing to charities depending upon how much insurance coverage could be purchased by the increased cash distributions from the charitable remainder trust.
Charitable remainder trusts used in conjunction with wealth replacing irrevocable life insurance trust can provide substantial benefits in increasing retirement income as well as assets ultimately passing to family members while providing significant benefits to your favorite charities.