Legal Experience and Local Roots

Offering professional legal services to individuals and businesses since 1986.

Have you considered a charitable remainder trust? – III

On Behalf of | Jul 19, 2017 | Estate Planning |

In a series of ongoing posts, we’ve been examining how those who find themselves in the unexpected position of being able to leave a not insubstantial amount to a favorite charity need to carefully consider all of the their options, including the creation of a charitable remainder trust. 

To recap, a charitable remainder trust is an estate planning instrument that facilitates the giving of sizeable charitable gifts while simultaneously providing the trust creator — i.e., the trustor — with considerable advantages relating to income tax, estate tax and capital gains tax. 

We’ll conclude this examination in today’s post, focusing on the two types of income that can be paid to a trustor by a charitable remainder trust.

Percentage payments

If the trustor elects to be paid via percentage payments, this means he or she will receive an annual payment that is a set percentage of the current value of the fund. In other words, the value of the trust will be reappraised at the conclusion of every year and the percentage payment made accordingly.

This means that while the percentage paid will never change, the amount paid to the trustor might very well change depending upon how well the charity has invested and managed the funds over the year.

To illustrate, if a trustor funds a charitable remainder trust with $1 million and elects to receive 5 percent of the trust value per year until her demise, she would receive $50,000 during the first year.

Annuity payments

If the trustor elects to be paid via annuity payments, this means he or she will receive an annual payment that is a set dollar amount, meaning the same payment will be received each year regardless of trust performance.

If the amount of the annuity is set too high, however, the amount of the income tax deduction will be minimized and the trust principal potentially depleted if performance is off. Indeed, this latter reality might make a charity reluctant to take on the role of trustee if annuity payments are selected.

Conversely, if the amount of the annuity is set too low, the amount of the income will be greater, but the trustor will never fully realize the benefit of the charitable remainder trust.   

It’s because of this uncertainty that more trustors select percentage payments. 

Here’s hoping the foregoing discussion has proven helpful. If you would like to learn more about establishing a charitable remainder trust or creating a comprehensive estate plan, consider speaking with an experienced legal professional.