Summary of Federal Laws
Tax Issues Related to Charitable Remainder Trusts
A charitable remainder trust is a vehicle for a deferred giving transaction. The IRS rules describe a charitable remainder trust as a trust which provides for a specified distribution, at least annually, to one or more beneficiaries, at least one of which is not a charity, for life or for a term of years, with an irrevocable remainder interest to be held for the benefit of, or paid over to, charity.
26 CFR §1.664-2 sets forth the tax rules for a charitable remainder annuity trust. In a charitable remainder annuity trust, the donor transfers property in trust, reserves an annuity interest for a nonheritable beneficiary(ies) and contributes the remainder interest in the property to a charitable organization. If tax rules are followed, the remainder gift will qualify for a charitable deduction for income, gift and estate tax purposes.
26 CFR § 1.664-3sets forth the tax rules for a charitable remainder unitrust. A charitable remainder unitrust is a trust that holds property (stock, bonds, cash and at times difficult to value assets like real estate) and pays quarterly/monthly/annually to the lifetime beneficiaries a set percentage of the annual value of the unitrust and contributes the remainder interest in the property to a charitable organization.
The difference between a charitable remainder annuity trust (CRAT) and a charitable remainder unitrust (CRUT) is the method for determining the amount of payment to be made to the income beneficiaries. In a CRAT, the donor reserves a sum certain annuity, and in a CRUT the donor retains a variable annuity.
Because the tax rules are so complicated with respect to charitable remainder trusts, the IRS in 2005 released a series of bulletins that provide sample trust documents for use in creating these instruments. See the Resources below. The Tax Code requires the payout rate to be at least 5% and not more than 50% of the initial net FMV.
Q and A
Q. What is a NI-CRUT and a NIM CRUT?
A. A charitable remainder unitrust is a trust that holds property (stock, bonds, cash and at times difficult to value assets like real estate) and pays quarterly/monthly/annually to the lifetime beneficiaries a set percentage of the annual value of the unitrust. The payment to the beneficiary is mandatory. Thus, if the trust holds property that has value but does not generate income, making the mandatory distribution can pose a serious problem.
Thus, the IRS has approved and published a model for a NI-CRUT -- a net income only charitable remainder unitrust. It requires that the unitrust to pay to the beneficiary the lesser of the unitrust amount (i.e., a set percentage of the unitrust's value) or the unitrust's net income, whichever is lower. If the unitrust has no income, no payment is required to the beneficiary.
A slight variation of the NI-CRUT is the NIM-CRUT -- a net income with make up charitable remainder unitrust. This alternative requires that if, because the unitrust has no income or insufficient income to make the unitrust payment to the beneficiary, when it has income later, it "makes-up" the payments that were missed.
Sometimes, a hard to sell asset that generated little income is sold by a unitrust and the proceeds are then invested in liquid assets (stocks, bonds, cash). In that case, there is no reason for the unitrust to be "net income only" any longer. In that case, the IRS allows the unitrust to "flip," i.e., to switch from the "net income only" model to a garden variety model where it distributes the unitrust amount regardless of the unitrust's income. A "flip" unitrust is particularly useful where the unitrust holds nonincome producing real estate; the triggering event for the "flip" is the sale of that real estate.
Answer Courtesy of Thomas Arden Roha, Esquire, Roha & Flaherty
Note from Law Offices of Bertrand M. Harding, Jr., Feb. 2014:
In PLRs 201408032 and 201408034, the IRS ruled that a section 501(c)(3) organization’s issuance of “endowment units” that permit certain charitable remainder trusts to invest in the organization’s endowment -- and the holding and redemption of such units by the trust -- will not result in unrelated business income to either the organization or the trust. A copy of these rulings can be found at http://www.irs.gov/pub/irs-wd/1408032.pdf, and http://www.irs.gov/pub/irs-wd/1408034.pdf.
August 22, 2005 Table of Contents for Revenue Procedures 2005-52-59. This IRS page contains sample documents for the following
Charitable Remainder Trusts (explanation of how they work)
Page created 8-25-2013 mlo
CCR updated CFR links 5/21/15