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________________________________________________ Charitable Gifts
/Charitable Trusts Choose
the Charitable Remainder Unitrust Option To Meet Your Needs For example, Beth creates a CRUT and funds it with $1 million.
The CRUT terms require the trust to pay Beth 7% of the value of
the trust assets each year for 20 years. Beth will receive a distribution
of $70,000 in the first year. If the trust assets grow to $1.1 million
in the second year, Beth will receive $77,000. At the end of the
trust term, Beth's favorite charity will receive the balance of
the trust assets. Use
a CRUT To Defer Taxes on Appreciated Assets CRUTs can be ideal vehicles to defer tax liabilities on appreciated
assets. Why? Because the trustee of a CRUT can sell the appreciated
assets transferred to the trust without incurring capital gains
tax, though the annuitant is responsible for income tax on the payment
he or she receives each year. For example, if Beth sells $1 million of stock, for which she had
paid $100,000, she will pay $180,000 in tax, leaving her $820,000.
To receive the $70,000 annual income stream she needs, she will
have to earn a 9% return. If instead she funds a CRUT with the stock,
and the CRUT sells it, the full $1 million will be available to
invest because the CRUT will pay no immediate capital gains tax. CRUTs don' t work as well when funded with assets that produce
no income, such as real estate. If the assets held by a CRUT do
not produce enough income to meet the annual payment obligation,
the trustee will be forced to use the trust corpus to transfer a
portion of the assets back to the annuitant as a part of the payment.
This will reduce the trust's ability to produce income in the future
and leave less for the charity at the end of the trust term. Use
a NIMCRUT To Hold Currently Unproductive Assets If you are interested in funding a CRUT with assets that are currently
unproductive but are likely to be productive at some point over
the trust term, consider using a NIMCRUT instead. Under the NIMCRUT,
the annuitant receives the lesser of either the net income earned
by the trust during the year or a fixed-percentage amount. A make-up
account is established for years when the trust pays less than the
percentage amount, and any shortfall is made up in years the trust
earns more income than the percentage amount. Using our previous example, if the NIMCRUT earns $60,000 in the
first year, Beth will receive a payment in that year of $60,000,
because this is less than the 7% required amount. If the trust earns
$90,000 in the following year, and assuming the value of the trust
is still $1 million, Beth will receive a payment of $80,000 -- the
$70,000 percentage amount, plus an additional $10,000 to make up
for the prior year's $10,000 shortfall. By using a NIMCRUT, the trustee avoids having to distribute a portion
of the trust corpus to an annuitant as part of the annual payment
in years in which the trust does not produce enough income. Thus,
a NIMCRUT preserves trust corpus while still, over time, paying
the annuitant the percentage he or she is entitled to under the
trust. But the trustee may face another dilemma if the unproductive asset
is sold. Generally, the terms of a NIMCRUT agreement forbid the
trustee to pay the fixed-percentage amount from capital gains or
trust principal. Therefore, the trustee may feel pressured to invest
for current yield, and produce additional income to make up prior
shortfalls to the annuitant, rather than to invest for total return,
which may better serve the long-term interest of the charitable
beneficiary. Use
a Flip CRUT To Benefit Annuity and Charity More Equally If you want to benefit the annuitant and the charitable beneficiary more equally, consider a Flip CRUT, a technique approved in last year's tax legislation. The Flip CRUT begins as a NIMCRUT and can be funded with an unproductive asset. This allows the trustee to make smaller or no payments to the annuitant in years the trust is earning little or no income. Once the asset is sold, the trust flips to a traditional CRUT,
which then pays the annuitant the fixed-percentage amount, allowing
the trustee to invest for total return. To qualify as a Flip CRUT, though, at least 90% of the fair market
value of the trust assets must be unmarketable at the time of trust
funding, and the trust' s governing instrument must provide that
it will be a NIMCRUT until the unmarketable assets are sold. At
that point, it will flip to a standard CRUT and the annuitant will
forfeit any make-up payments. Which
Vehicle Is Right for You? CRUTs, NIMCRUTs and Flip CRUTs can all be effective estate planning techniques if you want to make a charitable donation while retaining an income stream that can continue for the benefit of your spouse or children. If you have questions about these trust options, please contact us. We would like to help you determine which is appropriate for your situation. Flip
CRUT as a Retirement Planning Tool If you have no current need for income, you can fund a Flip CRUT
with an unproductive asset, retaining an income interest and receiving
a current income tax deduction. You can time the sale of the asset
to coincide with your retirement, when you will need additional
income. The trust will flip on the sale of the assets and begin
paying you income during your retirement years.
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©
Copyright 2001 Fahlman & Olson. All rights reserved.
LEGAL NOTICE
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