VanNess & VanNess, P.A.

Shedding some light on charitable remainder trusts - II

In our previous post, we began discussing how those people who find themselves in the enviable position of being able to give a considerable sum to their favorite charity may want to think twice about simply grabbing their checkbook and instead consider the advantages afforded by the creation of a charitable remainder trust. 

To recap, a charitable remainder trust is an irrevocable trust that provides the trust creator with a regular source of income during their lifetime, while also paving the way for both a large donation to be made to their preferred charity upon their death and the realization of substantial tax savings.  

How exactly can income be derived from a charitable remainder trust?

As we touched on last time, the charity serving as trustee will regularly pay a portion of the income generated by the trust to either the trustor (i.e., trust creator) or someone of their choosing for either a set number of years or up until the death of the trustor.

These payments, in turn, can be structured as either annuity payments or percentage payments.

What are annuity payments?

If the trustor opts to receive annuity payments, this means that every year they will receive the same fixed dollar amount no matter what. While this may sound like the best option at first glance, this may not necessarily be the case.

Indeed, a trustor only gets one chance to set the annuity amount. This is significant because if they set the annuity amount too high and the trust performs poorly for several years, they could actually start depleting the trust principal, meaning less is left for their charity at the end. Furthermore, their income tax deduction could be significantly less.

Conversely, while the income tax deduction will be greater if a trustor sets the annuity amount low, it may also mean that they never truly realize the benefit of the charitable remainder trust.

What are percentage payments?  

If the trustor opts to receive percentage payments, this means that every year they will receive a set percentage of the then-current value of the trust regardless of how much money it gained or lost over the preceding 12 months.

By way of illustration, if a trustor elects to receive a 5 percent payment -- the mandatory minimum amount set by the Internal Revenue Service -- this means that every year the trust will be re-appraised and the 5 percent payment made based on the determined value.

As you might imagine, this is the more popular payment choice among those setting up charitable remainder trusts.

We'll conclude this topic in our next post, examining some of the tax advantages of charitable remainder trusts.

Consider speaking with a skilled legal professional if you would like to learn more about creating a trust, trust administration or some other estate planning matter.

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