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Do you want charitable giving to be part of your estate plan? - III

In a series of posts, we've spent some time discussing how those who find themselves wanting to donate a sizeable sum to a preferred charitable organization while retaining some fiscal benefit and realizing some tax benefits may want to consider the creation of a charitable remainder trust.

To recap, a charitable remainder trust is created when the trustor transfers all the property or money they wish to give to a certain charity directly into the trust. Thereafter, the charity assumes the role of trustee, managing and safeguarding the trust funds, and paying a portion of the income generated by these trust funds to either the trustor or another named individual. Upon the death of the trustor, the charitable remainder trust terminates and the assets go directly to the charity.

How can a trustor receive a portion of the income generated by the charitable remainder trust?

In general, the trustor can elect to receive their payment in one of two ways: as fixed annuity payments or fixed percentage payments.

What are fixed annuity payments?

If the trustor opts for fixed annuity payments, it essentially means that they receive a set dollar amount (which cannot be changed at a later point) from the trust on an annual basis. This happens regardless of how the trust performs in a given year.

What are some considerations to keep in mind concerning fixed annuity payments?

If the trustor sets the fixed annuity payments too high, not only will their income tax deduction be reduced, but they may also reduce the principal of the trust if it performs poorly for an extended period. Indeed, it is this threat of potentially leaving nothing upon the death of the trustor that causes many charitable organizations to decline the role of trustee altogether if fixed annuity payments are too high.

Conversely, it should be noted that if the trustor sets the fixed annuity payments too low, they will secure a greater income tax deduction, but the full benefits of creating the trust in the first place will never really be realized.

What are fixed percentage payments?  

If the trustor opts for fixed percentage payments, it essentially means that they receive a set percentage of the trust's total value (which cannot be changed at a later point) on an annual basis. This happens regardless of how the trust performs in a given year.

By way of illustration, if the trust terms dictate that the trustor receives 5 percent of the value of the trust each year -- the minimum allocation required by the IRS -- the trust will be re-appraised every year to determine its current worth and five percent of this number will be paid out to the trustor.

What are some considerations to keep in mind concerning fixed percentage payments?

It's important to understand that fixed percentage payments are the more common arrangement and perhaps better equipped to account for the vicissitudes of the market.

If you have questions or concerns relating to the formation of a charitable trust -- or any other type of trust -- please consider meeting with a skilled legal professional. 

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