Charitable Remainder Trusts
A charitable remainder trust is similar to other types of trusts except that the amount distributed at its termination (the remainder) is paid to St. Lawrence University. A donor transfers property irrevocably to a trust and specifies: (1) the amount of income to be distributed; (2) to whom it is to be paid; (3) the duration of payments (a period of years or the beneficiary's(ies') lifetime); and (4) the charity (St. Lawrence) that will receive the remainder.
A charitable remainder trust can be set up through a transfer during a donor's lifetime or through a transfer at death under a donor's will, called a testamentary charitable remainder trust. A charitable remainder trust can offer a donor an escape from capital gains tax on highly appreciated properties. There are two charitable remainder trusts that are used most frequently, the annuity trust and the unitrust. Each of these trusts has separate features that can be used effectively to achieve planning objectives. When St. Lawrence is a co-trustee of a trust (and manages the trust with State Street Bank), a charitable remainder trust has a minimum gift size of $75,000, and is limited to two beneficiaries who are at least 50 years old.
THE ANNUITY TRUST
A charitable remainder annuity trust is a plan that pays a fixed dollar amount (annuity) to a named beneficiary(ies) for life, or a combination of life and term of years. The annuity, once fixed, cannot vary and no additional contributions can be made to the annuity trust after the initial transfer of assets. The annuity payment cannot be less than 5% of the initial fair market value of the trust assets.
If the invested annuity trust assets produce more total income than needed to pay the annuity, the excess is added to principal, thereby increasing the remainder amount ultimately payable to St. Lawrence University. If the annuity trust total income is less than required to meet the annuity payment, the difference must be taken from the annuity trust principal, thereby reducing the amount that will ultimately be paid to St. Lawrence.
Charitable Deduction
The charitable deduction is calculated based on the annuity rate, the initial value of the assets transferred to the trust, the date of transfer, the age and the number of beneficiaries and/or the term of years, and IRS tables for calculating remainder values. The annuity rate affects the charitable deduction in the following ways: a higher rate produces a smaller deduction and a younger beneficiary produces a lower charitable deduction.
Taxation
The tax on an annuity income is dependent upon the type of income earned and accumulated by the trust. Income paid to the beneficiaries is taxed based on a four-tiered hierarchy of ordinary income, capital gains, other income (including tax exempt), and return of principal.
THE UNITRUST
The charitable remainder unitrust has many features in common with the charitable remainder annuity trust, but there are important differences. The unitrust, like the annuity trust, is required to pay at least 5% of the initial fair market value; however, the payment does not remain fixed. It is recalculated each year based on the unitrust asset value as of a specific date each year, often January 1. This annual determination results in a variable annual payment, increasing or decreasing each year as the value of the unitrust changes over time. The variable nature of the unitrust payments may provide a hedge against inflation -- assuming that growth in the value of the trust assets is comparable to the inflation rate.
Charitable Deduction
The charitable deduction is equal to the present value of St. Lawrence's remainder interest in the unitrust as determined by IRS tables for calculating remainder values. The deduction is based on the fair market value of the asset transferred, the payout rate chosen and either the age and number of beneficiaries or the term of years.
TYPES OF UNITRUSTS
Standard - The trustee is allowed to invade principal to meet the required payout percentage.
Net Income - The trustee cannot invade principal and will payout the stated percentage or net income only.
Net Income with Make Up - If the net income is less than the stated percentage for a year, the trustee can make up payments in later years, when the income exceeds the required payout.
ADDITIONS TO A UNITRUSTOne of the many attractive features of all unitrusts is that additions may be made at any time, thus allowing for annual incremental gifts to be made to the unitrust. This feature is allowable if it is written into the original trust document. The unitrust can be funded with cash, long-term highly appreciated securities or real estate.
Questions can be directed to Thomas R. Pynchon Director of Planned Giving.
Or
Jennifer McElroy Assistant Director of Planned Giving
Or
Call the Planned Giving Office at (315) 229-5505
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Questions or Comments: mprahl@stlawu.edu
Last Update: June 20, 2000