Legal Definitions - charitable remainder trust

A charitable remainder trust is a specialized type of irrevocable trust designed to allow an individual, known as the grantor, to make a significant charitable donation while simultaneously receiving income from the donated assets for a period of time. In essence, the trust "splits" the benefits: the grantor or another designated beneficiary receives regular income payments for a specified term (which can be for life or a set number of years), and then the remaining assets in the trust are distributed to a chosen charity.

This financial tool offers several advantages. It provides a steady income stream for the grantor or their beneficiaries, often for their lifetime. Grantors can also benefit from immediate income tax deductions for the charitable portion of their gift and may avoid capital gains taxes if they contribute highly appreciated assets to the trust. Because it is an irrevocable trust, its terms are generally fixed once established.

There are two primary forms of charitable remainder trusts:

• Charitable Remainder Annuity Trust (CRAT): A CRAT pays a fixed dollar amount each year to the beneficiary. This amount is determined at the trust's inception, based on a percentage of its initial value. Once established, no additional contributions can be made to a CRAT.
• Charitable Remainder Unitrust (CRUT): A CRUT pays a variable amount each year. This payment is a fixed percentage of the trust's value, which is revalued annually. Since the payment amount can fluctuate with the trust's investment performance, a CRUT allows for additional contributions to be made to the trust even after its initial creation.

Examples of Charitable Remainder Trusts in Action:

• Retirement Income from Appreciated Assets: Imagine Dr. Eleanor Vance, a retired physician, owns a substantial portfolio of technology stocks she purchased decades ago for a very low price. These stocks have appreciated significantly, and selling them outright would trigger a large capital gains tax. Dr. Vance wants to supplement her retirement income and also leave a lasting legacy to her medical school. She decides to establish a Charitable Remainder Unitrust (CRUT). She transfers her highly appreciated stock into the CRUT. The trust then sells the stock without incurring immediate capital gains tax, and the proceeds are reinvested. Dr. Vance receives annual income payments, calculated as a percentage of the trust's value, for the rest of her life. Upon her passing, the remaining assets in the CRUT are distributed to her medical school. This demonstrates how a CRT can convert appreciated assets into an income stream, defer capital gains taxes, and achieve a philanthropic goal.

• Supporting Family and a Community Cause: The Chen family owns a successful manufacturing business they plan to sell to a larger corporation. Mr. and Mrs. Chen want to ensure their elderly aunt, who has always supported them, has a stable income for her remaining years, and they also wish to make a significant contribution to a local community foundation. They decide to create a Charitable Remainder Annuity Trust (CRAT). After selling their business, they place a portion of the proceeds into the CRAT. The trust is structured to pay a fixed annual income to their aunt for her lifetime. Once their aunt passes away, the remaining principal in the CRAT will be donated directly to the community foundation. This example illustrates using a CRT to provide financial security for a loved one while simultaneously making a substantial future gift to a cherished charity.

• Converting Non-Liquid Assets for Income and Conservation: Sarah and Mark own a valuable, undeveloped beachfront property that has been in their family for generations. They are passionate about coastal preservation and want to ensure the land is protected from commercial development, eventually donating it to an environmental conservation organization. However, they also need to generate some additional income now. They establish a Charitable Remainder Unitrust (CRUT), contributing the undeveloped land to it. The CRUT then sells the land to a buyer (who agrees to specific conservation easements), allowing Sarah and Mark to avoid immediate capital gains taxes on the sale. The proceeds are invested, and Sarah and Mark receive annual income payments based on a percentage of the trust's value for a period of 25 years. After 25 years, the remaining funds in the CRUT are transferred to the designated environmental conservation organization. This shows how a CRT can transform a non-liquid asset into an income stream, provide tax benefits, and fulfill a specific conservation objective.