Charitable Remainder Trusts

Source: AARP.org | November 25, 2002

Charitable Remainder Trusts

What Is a Charitable Remainder Trust?

A gift to the AARP Foundation via a charitable remainder trust is accomplished by allowing an attorney to create this irrevocable document. Cash, bonds, stock and/or real estate can be contributed to the CRT which is managed by a trustee. The family member or professional trustee may sell assets and reinvest the proceeds. The trust makes systematic payment to beneficiaries named by the donor. Payments are elected for life or a period of time up to 20 years. On the death of the last beneficiary, or the end of the specific time period, the trust ends. The remaining amount in the trust is distributed to the AARP Foundation.

Trusts are often established because of a person's concern for someone else's needs, such as providing security for family members. They are also used in estate planning for their flexibility and ability to reduce income and estate taxation. Favorable taxation can give rise to increased growth of assets managed inside the trust and, thereby, producing benefits including increased income to its recipients.

Types of Charitable Remainder Trusts

There are two types, the annuity trust and the unitrust. The charitable remainder annuity trust (CRAT) provides a fixed annual payment or a payment based on the percentage of the value of the initial trust assets. Payments never vary over the trust term. The charitable remainder unitrust (CRUT) renders a fluctuating annual payment based on a percentage of the trust assets as revalued each year. Conservative donors prefer the annuity trust. Those who are willing to accept risk, but with greater flexibility, chose the unitrust.

How Charitable Remainder Annuity Trusts Work

The distinguishing characteristic of the charitable remainder annuity trust (CRAT) is its stream of non-varying and predictable payments during the life of the trust. The CRAT provides an annual payment of at least five percent of the fair market value of its assets at the time when the trust was established. The donor selects the percentage amount when the trust is written.

Donors should be aware that payments from a charitable remainder trust are not guaranteed. The payments will only be made as long as assets are adequate to make the desired payments. If the trust asset diminishes to zero, it is terminated.

Income Tax Advantages

The charitable remainder trust retains several tax benefits. If a donor is filing an itemized Income Tax Return, the donor claims an income tax charitable deduction for the value of the AARP Foundation's "remainder" interest. US Treasury tables are used to calculate the remainder interest based on the beneficiary's age(s) (or the term of the trust, if 20 years or less), the payoff percentage, and the federal interest rate. The income tax deduction is a discounted value of the amount that the AARP Foundation will receive when the trust ends (remainder).

What Happens to Capital Gains When a Gift of Appreciated Property Occurs?

When a person sells property that has gone up in value, the entire amount of the realized capital gain is taxed in the year the asset was sold. If a donor elects to establish a charitable remainder trust with appreciated securities or marketable real estate and the trust sells the asset(s), there is no capital gain. Under normal circumstances, the trust is tax exempt. When assets are placed in a charitable remainder trust, the size of the donor's estate is reduced by the amount donated. This could result in a reduction of estate taxes, as well as reduce probate court and estate administration costs.

Creating a Charitable Remainder Trust by Will

A charitable remainder trust created at death is called a "testamentary charitable remainder trust." Upon the donors death, his or her estate receives an estate tax charitable deduction for a portion of the trust's remaining assets and the Foundation receives a donation which is available at some future date.

A Charitable Trust Must Have a Trustee

Donors may choose to serve as their own trustee, while others elect to have their financial advisor, a bank official, or a financial services firm serve as trustee.

Under most circumstances, the donor names the person(s) who will receive trust payments. The donor can also be an income recipient. Payments can be made to an individual for life, followed by one or more successors, or to jointly benefit two or more people for their lifetimes then to survivors. When the trust terminates, the remaining assets are distributed to the Foundation.

The gift could be a unique expression of the donor's interest whether it is to further the Foundation's work by helping the vulnerable elderly in communities throughout our country or serving older adults in need and their family caregivers. The Office of Planned Giving helps the donor structure the gift which reflects special interests in the Foundation.

To learn more about your giving options, please contact:

Office of Planned Giving
Tel: 1-800-775-6776
Email: plannedgiving@aarp.org