Planned Giving: Charitable Remainder Trusts

As a life-income gift, charitable remainder trusts are a generous, continual way for a donor to leave a lasting impact on the preservation of Alaska’s agricultural community.

Often referred to as reminder trusts or CRTs, these gifts may have an immediate tax deduction and can return annual income to the donor. In some instances, depending on how the donor funds the remainder trust, it may be possible to reduce capital gains and estate taxes.

First things first. Talk to your attorney. They will prepare a charitable remainder trust document once they have sat down with you to understand your preferences to structuring your trust. Alaska Farmland Trust staff can help you and your attorney with the calculations, helping you determine the annual income you would receive as well as the charitable income tax deduction.

Before we can make those calculations  we need to have the following information:

  • age(s) of donor(s) putting together the trust;
  • estimate fair market value of the asset used to fund the charitable trust; and
  • your “cost” otherwise known as your tax basis in that asset.

Please Note: If your charitable remainder trust is being funded with land you must obtain an appraisal of the land’s fair market value before completing the creation for the charitable remainder trust. You only have 60-day window to transfer the land to the charitable remainder trust. Otherwise, you will need an additional appraisal letter. This usually is done in the form of a letter from the appraiser.

Also,

If your charitable remainder trust is being funded using securities, we will run the final calculation the date of transfer to determine the securities exact value.

If you are planning on making a planned gift of $100,000 or more AND you want to retain control over your investment during your lifetime and allow them to grow and get some income from them, then the Charitable Remainder Trust is right for you.

Please Note: A Charitable Remainder Trust is also good for you if your beneficiaries are young because they may see an appreciation of the principal and their annuity over the course of their lives.

If you are planning on giving a gift of between $5,000 and $100,000 charitable gift annuities will provide you with a fixed income payment over your lifetime.

Please Note: Gift annuities work best for donors age 75+ because they allow for a secure fixed annuity payment you can count on.

You income tax deduction is defined by a combination of factors:

  • Valuation of donate asset
  • Type of Remainder Trust chosen (annuity trust or unitrust)
  • Your annual income rate
  • # and ages of the those receiving income (your income beneficiaries). The exception to this is if it is a fixed term remainder trust, the the number of years in the term will be used).
  • The monthly calculated federal discount rate that is set by the Federal Reserve board.

The Alaska Farmland Trust can help you with the calculations to see if this style of planned giving is right for you.

Things to note:

  1. The fewer and older the beneficiaries, the greater the charitable income tax deduction.
  2. The same tax rules that apply to charitable contributions, apply to a remainder trust.
  3. A donation of appreciated property can deduct up to 30% of adjusted gross income (AGI).
  4. A donation of cash can deduct up to 50% of AGI.
  5. Donor can carry forward any unused deduction for up to five years.
This website is intended to be an educational guide only and should not be seen as legal, accounting or any other professional advice.  Please consult with the professionals in the instance that you would like to make a bequest to the Alaska Farmland Trust.

There are two kinds of trusts that can be established. Each kind will determine how the beneficiaries are paid out.

  1. The first, called a interest, distributes income to a beneficiary based on fixed percentage of the trust’s assets. This is recalculated annually but the trustee. This payment is generally at least 5% of the total asset. The actual amount will fluctuate as the trust’s assets value changes.  This type of trust is ideal for donors under 75 as it allows for the amount to change as the principal appreciates in value.
  2. The second is called an annuity trust that provides a fixed payment that is equal to or greater than 5% of the original value of the asset. The payment stays constant, regardless of the changes in the value of the trust. For donors over the age of 75, this fixed annuity provides the security of a set income.

Land is a great way to fund a remainder trust. Here is why:

  • Land is often owned for a long time, so often has appreciated in value.
  • When land is sold off, this often triggers large capital gains taxes.
  • However, when the land is used to fund the remainder trust, NO CAPITAL GAINS TAX IS DUE upon the sale of the land. When stein up a CRT, there is often a clause included that income beneficiaries will not receive payment until the land sells and the proceeds are placed in the trust to ensure that no capital gains tax would be triggered.

If the land has conservation values:

It is often best to put a conservation easement on a parcel of property prior to the placing it in the remainder trust.  If this does not happen, the trustee might be required by law to sell the property at its full value.

PLEASE NOTE: The Land is No Longer Yours

In the instance that a piece of property is put into a remainder trust, it can no longer bey used personally by the donor or the family.

When you set up the trust, the donor and heirs no longer have access to the principal.  Before embarking on establishing a remainder trust, donors should consider if they have sufficient capital to provide for their future needs.

Possibility of Charitable Income Tax Deductions

CRTs have the benefit of being included as a charitable income tax deduction for the donor IF AT LEAST 10 PERCENT of the amount put into the trust will pass to the charity when the donor dies.

The year the the remainder trust acquires the asset, a charitable tax deduction can be taken depending upon:

  • Value of donated property
  • number and ages of the income beneficiaries
  • annual pay-out rate selected

If the deduction can’t be taken in the first year, int unused deduction can be carried forward for five years.

No Capital Gains Tax

When you put an asset into a remainder trust, and later when that asset is sold through the trust, no capital gains tax is due on the sale. The ultimate benefit to this is that you can take a low-earning asset (land, stocks, bonds) and convert it into a higher-earning one without a loss of signification capital because of taxation.

Possible Lower Estate Taxes

Remainder Trusts, once in place, are no longer part of your estate, so it may lower your estate taxes.

Easy Transfer of Assets to the Charitable Organization

When the charitable remainder trust is terminated, the assets that remain will go to the Alaska Farmland Trust with expense or delay of probate.

Remainder Trusts Provide for Your Family and Your Community

This mechanism is a great way to give immediate income to you and your family while profiling long-term financial support to the Alaska Farmland Trust.

 

You should consider this form of donation if you have substantial resources and own highly appreciated assets that ear a low rate of return (like stock) or cost money for your to maintaining (like real property). Remainder trusts are more complex to set up than gift annuities, which is why we recommend that the gift should have a value of at least $100,000 and the income beneficiaries are less than 75 years old.

 

Put simply, it is an independently managed account that issues payments to beneficiaries.  A CRT can be set up for a fixed term put to 20 years or for the lives of the beneficiearies. When the trust terminates, the remaining assets would be transferred to the Alaska Farmland Trust.

Funding a Charitable Remainder Trust

This type of trust is usually funded with cash or appreciated property including stock, bonds, land or other marketable property).  On a quarterly, semi-annual, or annual basis, you or your designated beneficiaries will be paid annuity payments for the duration of the trust.

Assigning a Trustee to Run the Trust

It is advisable that the a financial institution or a lawyer be designated as a trustee. It is not recommended for the donor to be their own trustee.  The trustee is responsible for managing the assets to generate money for the beneficiaries. At the same time, the trustee is responsible for increasing the principle for the charitable beneficiary.

 

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