Frequently Asked Questions

  1. What is a Charitable Remainder Unitrust?
  2. What Formats are available for Charitable Remainder Unitrusts?
  3. What are some possible, personal financial benefits for creating a Charitable Remainder Trust?
  4. Who are the Candidates for a Charitable Remainder Trust?
  5. How is the income tax charitable deduction calculated for a gift to a Charitable Remainder Trust?

  6. What are the gift and estate tax consequences of retaining an income interest in a Charitable Remainder Trust?

    A charitable remainder trust consists of a gift of remainder interest with a retained income interest. Gifts made to charity via a charitable remainder trust qualify for unlimited gift and estate tax deductions for the present value of the remainder interest. However, a gift, estate or generation skipping transfer (GST) tax can be generated on the value of the retained income interest if it is transferred to someone other than the Trustor, the Trustor’s spouse or charity. Further, a charitable remainder trust that is disqualified can produce a transfer tax. The rules governing the gift and estate tax consequences of the retained income interest are best described by examples: 

    A. Trustor as Sole Income Recipient

    Suppose a Trustor establishes a charitable remainder trust naming herself as sole life income recipient. The transfer qualifies for a charitable gift and GST tax deduction in an amount equal to the present value of the remainder interest in the year the trust is created. Since she retains an income interest and the right to change the charitable recipients, there are no further gift tax consequences (assuming no one else transfers property to the trust). Because she retained a lifetime cash flow interest, upon her death, the full value of the trust will be included in her estate. However, the full value of the trust will be deducted from her taxable estate via the estate tax charitable deduction.

    B. Non-Trustor as Income Recipient

    Suppose a Trustor funds a charitable remainder trust naming another person as an income recipient. Again, the transfer qualifies for a charitable gift and GST tax deduction in an amount equal to the present value of the remainder interest in the year the trust is created. However, in this case, the Trustor has made a gift of an income interest to the income recipient. The amount of the gift is equal to the present value of the income interest attributable to the non-Trustor recipient. If the Trustor is also an income recipient, the amount of the taxable gift will also depend upon whether the non-Trustor recipient has a concurrent or successive income interest. See Section F for further discussion.

    C. Marital Deduction

    If the income recipient is the Trustor’s spouse at the time of transfer, the transfer will qualify for the unlimited gift tax marital deduction (provided the spouses are the sole non-charitable recipients of the trust). However, the estate tax marital deduction will not be available if the couple subsequently divorces during the term of the trust.

    Caution: The marital deduction is available only if married Trustors are the sole income recipients of the trust. For example, a trust that has a term measured by the longer of the lifetime of the Trustor and spouse, or a term of years will not qualify for the marital gift or estate tax deduction since the possibility exists that persons other than the Trustor or spouse will receive income.
     
    D. Non-citizen Spouses

    A question arises regarding the availability of the marital deduction when the Trustor’s spouse is not a U.S. citizen. Gifts by a U.S. citizen spouse to his/her non-citizen spouse do not qualify for the unlimited marital deduction. Instead, present interest gifts to the non-citizen spouse may qualify for an annual gift tax exclusion for gifts up to $133,000 during 2009. Certain transfers in trust are also eligible to qualify for an estate tax marital deduction under IRC §2056A as a Qualified Domestic Trust (sometimes referred to as a QDT or QDOT).

    The IRS has ruled privately that a properly structured charitable remainder trust will also qualify as a QDT, thereby qualifying for the unlimited estate tax charitable deduction upon termination. Some factors for the IRS' approval of a QDT-CRT are: the non-citizen spouse's interest does not start until the Trustor spouse dies, the Trustor spouse's estate elects QDT treatment for the CRT, the CRT is required to withhold the QDT tax on the non-citizen spouse's distributions, the Trustor reserves the right to revoke the non-citizen spouse's surviving interest, and the QDT-CRT contains provisions necessary to qualify as both a QDT and a CRT. See Internal Revenue Code §2056A, its accompanying Treasury Regulations, Revenue Procedure 96-54, and Private Letter Rulings 9224013, 9845015 and 9845016. The Revenue Procedure contains sample language to qualify as a QDT.

  7. What tax and information returns are required after a Charitable Remainder Trust is created?
  8. What are the Annual Valuation Rules for Charitable Remainder Unitrusts? and Why are the Annual Valuation Rules Important?
  9. What is a Charitable Remainder Annuity Trust?
  10. What Factors Should I Consider When Choosing a Payout Format for my Charitable Remainder Trust?
  11. How do I select a measuring term for my Charitable Remainder Trust?
  12. What are some methods of income deferral within a Flip Charitable Remainder Unitrust (Flip-CRUT) or a Net Income with Makeup Charitable Remainder Unitrust (NIMCRUT)?
  13. What is a Flip Charitable Remainder Unitrust (Flip-CRUT)?
  14. What are the Typical Responsibilities of a Trustee of a Charitable Remainder Trust?
  15. What is an “Independent” Special Trustee (IST)? When is an IST used in Charitable Remainder Trust Planning?
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