Charitble Remainder Annuity/Unitrust Trusts

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SnapShots
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Charitble Remainder Annuity/Unitrust Trusts

Post by SnapShots »

I wondering if anyone has any experience or knowledge regarding Charitable Remainder Annuity Trusts or Charitable Remainder Unitrusts.

Situation: I own a nice garden home, which is a rental property, obtained through a 1031 exchange about 10 years ago. I am no longer interested in managing a rental property. Ideally, I would sell the property and purchase an annuity. However, selling is not an option as it will trigger a significant tax hit. Assessed value of the home is $175,000. If sold, taxes owed are $50-$60K.

I have read I can donate the property to a charity, under a tax provision made in 1969, establishing Charitable Remainder Annuity Trusts and Charitible Remainder Unitrusts (CRT/CRUT). Giving the property to a charity under this provision makes the taxes go away and the donor receives a charitable income tax deduction. In addition, donors are paid a a fixed amount of income each year, similar to an immediate annuity. Or, a donor may receive a percentage of it's value determined at the end of each year.

When the donor dies the charity receives the remainder of the trust. Similar to an insurance company keeping what's left from an annuity purchase. I have read there is a 20 year limit on payments. Payments to donors must be a minimum of 5% and not more than 50% per year.

I have contacted our local hospital foundation, which advertises they have Charitable Remainder Trusts (CRT). They are going to get back with me. I'm concerned they may be not financially strong enough to manage these types of trusts. I know there many other charitable organizations that would be an option.

I would like any insight some of you may have regarding CRT's. Pros. Cons. Things to be aware of.

Thank You...

http://plannedgiving.med.upenn.edu/char ... tyrust.php
http://en.wikipedia.org/wiki/Charitable ... uity_Trust
http://en.wikipedia.org/wiki/Charitable ... r_unitrust
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pjstack
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Re: Charitble Remainder Annuity/Unitrust Trusts

Post by pjstack »

I set up a charitable remainder unitrust by donating some GE stock left to me upon my father's death.
Although the University of New Hampshire is the recipient upon my death, the actual investment is handled by TD Wealth Management. (TD=Toronto Dominion branch in the U.S.)

The payout is 5% of the end-of-year value. According to the paperwork I've received, the proceeds of the sale of the original GE stock is invested by TD in a very Boglehead fashion.

I did receive a tax deduction that took me a few years to use. (There is a certain ratio of deduction to income that can be used per year.)
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Gill
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Re: Charitble Remainder Annuity/Unitrust Trusts

Post by Gill »

The taxes don't "go away". The capital gain will be distributed to you with the payouts.
Gill
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pjstack
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Re: Charitble Remainder Annuity/Unitrust Trusts

Post by pjstack »

Gill wrote:The taxes don't "go away". The capital gain will be distributed to you with the payouts.
Gill
That's true. But, the deduction from the original donation is substantial(at least in my case).

Remember, Unitrusts are a charitable donation, not really an investment.
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dhodson
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Re: Charitble Remainder Annuity/Unitrust Trusts

Post by dhodson »

Gill wrote:The taxes don't "go away". The capital gain will be distributed to you with the payouts.
Gill
I'd be curious who gave the OP the idea that the taxes would "go away"?
sscritic
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Re: Charitble Remainder Annuity/Unitrust Trusts

Post by sscritic »

I found this, which says you get ordinary dividends first, then qualified dividends, then short-term cap gains, ...:
The tax character of distributions to the beneficiary is determined on an annual, calendar-year basis. IRS rules treat distributions as made from Category 1 first until the full amount of Category 1 has been exhausted, and so on down through all four categories. To the extent income in any tier is not distributed, it is carried forward to subsequent years until it is finally distributed.
Income categories:
1 ordinary income in this order:
  • Ordinary income excluding qualified dividends
    Qualified dividends (15% or 0% rate*)
2 Capital gains in this order:
  • Short-term capital gains
    28% rate long-term gains from collectibles and Sec. 1202 stock
    25% rate long-term gains from unrecaptured Sec. 1250 gains
    15% or 0% rate* long-term gains not included in categories listed above
3 Tax-exempt income
4 Tax-free return of principal
bsteiner
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Re: Charitble Remainder Annuity/Unitrust Trusts

Post by bsteiner »

I've set up lots of charitable remainder trusts.

A CRT provides payments of a specified percentage of the value of the trust to one or more individuals, for life or a term of up to 20 years. After that, the balance goes to charity. In a unitrust, the percentage is applied to the value of the trust from year to year. In an annuity trust, the percentage is applied to the initial value of the trust.

A CRT lets you diversify out of an appreciated asset and spread out the capital gains tax.

The actuarial value of the charity's interest has to be at least 10% of the value of the trust as of the inception.

The income tax benefit of the deferral approximately offsets the required value of the charity's interest, so you'll usually come out about even, thus giving the charity a substantial benefit at little or no cost to you.

The disadvantage is that there is some cost and complexity, and some inflexibility.

It works well for people in the middle. The very wealthy can simply give the appreciated asset to charity, and at the other end of the spectrum people can't afford to lock in the structure

You or your family members can (and typically would be) the trustees. You can (and typically would, unless you want to commit in advance to specified charities) retain the right to change the charities that will receive the remainder interest.

Any law firm with a good trusts and estates practice should be familiar with CRTs, and should be able to help design it and then draft it, and then explain to the accountant what's needed in the way of income tax returns.
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Re: Charitble Remainder Annuity/Unitrust Trusts

Post by SnapShots »

bsteiner wrote:I've set up lots of charitable remainder trusts.

A CRT provides payments of a specified percentage of the value of the trust to one or more individuals, for life or a term of up to 20 years. After that, the balance goes to charity. In a unitrust, the percentage is applied to the value of the trust from year to year. In an annuity trust, the percentage is applied to the initial value of the trust.

A CRT lets you diversify out of an appreciated asset and spread out the capital gains tax.

I've considered selling the property and carrying the note for 4-5%. Would the end result be about the same??? The upside is our children would inherit the payments. The downside is carrying the note. :wink:

The actuarial value of the charity's interest has to be at least 10% of the value of the trust as of the inception.

The income tax benefit of the deferral approximately offsets the required value of the charity's interest, so you'll usually come out about even, thus giving the charity a substantial benefit at little or no cost to you.

The disadvantage is that there is some cost and complexity, and some inflexibility.

It works well for people in the middle. The very wealthy can simply give the appreciated asset to charity, and at the other end of the spectrum people can't afford to lock in the structure

You or your family members can (and typically would be) the trustees. You can (and typically would, unless you want to commit in advance to specified charities) retain the right to change the charities that will receive the remainder interest.

Any law firm with a good trusts and estates practice should be familiar with CRTs, and should be able to help design it and then draft it, and then explain to the accountant what's needed in the way of income tax returns.
Below is a UCLA gift test calculator. This is just an example. There are lots of calculators.
https://ucla.giftlegacy.com/?DID=1956&pageID=22

I can see this is much more complicated than I thought.

An you noted above, I have read family members can serve as the Trustees, and you say generally this is how it's done. How exactly, does that work?
  • We make our children Trustees of a Charitable Remainder Trust.
    We gift the property to the CRT
    The children as trustees sell the property and invest the money
    As Trustees they distribute income from the property ... set up as an annuity
    We receive a charitable tax deduction for the donation
    A portion of the annuity income is tax exempt
    A minimum of 10% of the property value must be reserved for a charity; distributed at our death or 20-yr?
It appears, $175K is not enough money - at our young ages 70 & 66 :-) - for a Charitable Remainder Annuity Trust? When I run the Test Calculator for Charitable Remainder Annuity Trust in the amount of $175K plus two lives this is the message I get.

Maximum Payout Rate For 5% Probability Test Under Revenue Ruling 77-454 is less than minimum required 5% payout. Trust not permitted with this duration.


When I run the Test Calculator for Gift Annuity for $175K and two lives it estimates:
  • Gifting property to the charity increases payout from 2% to 4.4%
    Fixed payment is $7,700 per year - until death
    Tax Free portion of payment is $5,428 per year
    Income tax deduction $54,548 (calculated @ 15% income rate saving $13,637)
    Total Payout estimate is $180,181 - 5.9%
    Estimated Charity would receive the same amount - $180,181
Considering my particular issue ..... I do not understand how the Gift Annuity and Charitable Remainder Annuity Trust (CRT) are different. I understand: You can add money to the Gift Annuity ... which is a real annuity. You cannot add money to the CRT.

Thanks to All for your replies ....
the best decision many times is the hardest to do
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