Charitable Remainder Unitrust

In this post, I discuss the charitable remainder unitrust, the estate planning benefits it offers, and how it can provide you income now.

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In a previous post I discussed some charitable planned giving techniques. In this post, I will focus specifically on the charitable remainder unitrust.

Nature of the Trust

A charitable remainder unitrust is a trust created for the ultimate benefit of a charitable organization that nonetheless initially benefits a noncharitable person. So, for example, if you were to create such a trust for your own benefit but for the ultimate benefit of the Red Cross, you would receive distributions from the trust during your life—or another set period of time—with the remainder going to the Red Cross when the trust term ends.

There are a variety of reasons to establish such a trust. The grantor may be entitled to a charitable deduction at the time the trust is established, though determining the amount of the deduction can be quite complex.

A charitable remainder unitrust can also serve as a good way to mitigate capital gains taxes. While the noncharitable beneficiary of the trust must pay income taxes on the distributions when the distributions are actually made, any capital gains received by the charitable beneficiary will pass tax-free with no capital gains tax due.

To qualify as a charitable remainder unitrust, the trust must meet some special requirements. The annual payment to the noncharitable beneficiary must be at least 5%, but no more than 50%, of the charitable remainder unitrust’s fair market value.

The trust’s assets are valued annually to determine the amount to be distributed. In addition, the amount expected to go eventually to charity must be at least 10% of the value contributed to the trust.

Charitable Remainder Unitrust and Estate Taxes

A charitable remainder trust is one method of avoiding the estate tax, while still providing for your surviving spouse at your death. A charitable remainder trust—both the unitrust and annuity trust—is created pursuant to Internal Revenue Code § 664.

A common use of these trusts is to create them at the testator’s death with the trust benefitting the surviving spouse during his or her life with the remainder going to a charity at the surviving spouse’s death. In order to take advantage of the estate tax exemptions available, the surviving spouse must be the only noncharitable beneficiary of the trust.

The Charitable Remainder Annuity Trust

While this post focuses on the charitable remainder unitrust, there is also a charitable remainder annuity trust available. The significant difference between the two is how distributions are calculated.

Unitrusts are distributed according to a percentage of the trust’s value—such as a distribution of 5% of the trust’s value annually—whereas an annuity trust distributes a more predictable annuity—such as $10,000 per year. Otherwise, the two types of charitable remainder trusts are essentially the same with very similar tax benefits.