By Cary W. Tucker
To satisfy your charitable inclinations you’ve decided that you definitely want to set up a charitable remainder trust (CRT). You know exactly how much money you plan to put aside now to fund the CRT. You’ve chosen the recipient to collect the trust income as well as the charity to be the remainder beneficiary of your CRT. What else is there for you to ponder before you meet with the estate planning lawyer?
There are actually two different types of charitable remainder trusts: a charitable remainder annuity trust (CRAT) and a charitable remainder unitrust (CRUT). With a CRAT, the trust distributes a constant income stream that does not fluctuate, regardless of investment performance. With a CRUT, the trust distributes an income stream that does depend on investment performance and that can fluctuate.
Since the income stream from a CRAT does not change from year to year, the income does not keep up with inflation nor have any cost-of-living adjustment. If the CRAT is designed to last for a relatively limited number of years, then perhaps inflation may not be such a concern. Maybe the recipient simply prefers to receive a guaranteed and steady trust income for a brief time.
Moreover, the federal government is very clear — per Treasury Reg. 1.664-2(b) — that following the initial funding contribution, no additional contributions can be made to a CRAT. There is a way to increase CRAT income, namely to create another CRAT. However, creating a whole separate CRAT may require substantial legal costs.
Unlike the fixed, unchanging income from a CRAT, the variable income from a CRUT can serve as a hedge against inflation. However, a CRUT also carries a risk that if the value of the trust assets drops, the amount of the income stream will likewise decrease. Alas, is there any way to hedge against the risk of falling income from a CRUT?
In order to calculate the variable income amount — according to I.R.C. § 664(d)(2) — the market value of the CRUT assets must be revalued every year. The federal Code further indicates that the income amount can be specifically increased in a given year, not due to investment growth but because additional contributions can be made to the CRUT. Not happy with the CRUT income soon to be received? Then you can make another tax-deductible donation to the CRUT, increasing the trust holdings and increasing the trust distributions.
Therefore, before you meet with the estate planning attorney to request that he or she write up a new charitable remainder trust for you, please consider:
- Are you seeking a fixed or variable income from the CRT?
- Do you or do you not want to be able to make additional contributions to the CRT?
About the author: Cary W. Tucker, CFP®
Cary W. Tucker, CFP®, is a former paralegal who transformed into a paraplanner. With an estate planning background and over a dozen years of experience in the financial services industry, Cary enjoys providing solutions for financial health.