Charitable giving is an essential part of many estate plans. If offers an opportunity for the affluent to leave a mark in the world beyond their own homes and families. And our estate planning laws are set up to encourage such things, offering financial incentives for people to donate sizable portions of their estates to charitable organizations.
By far the most popular vehicle for charitable giving is the charitable remainder unitrust. According to IRS statistics collected by the National Philanthropic Trust, there were 93,828 charitable remainder unitrusts in the U.S. as of 2011, holding a collective $86.9 billion in assets.
That adds up to approximately 80 percent of all the charitable trust vehicles. So clients — and even some estate planners — can be forgiven for thinking that is their only real option for setting up a charitable giving plan.
But it’s not perfect for everyone. Some clients would be better off with other options. Here are some considerations that may lead clients to consider alternatives to the charitable remainder unitrust:
The client wants consistent payouts. The significant difference between a charitable remainder annuity trust and a unitrust is that the former guarantees equal payouts for each year (or other designated term). Under a charitable remainder annuity trust, the payments are designated to be at least five percent of the trust’s initial value.
A unitrust’s payments must be equal to at least five percent of the annual value of the trust’s property, which fluctuates in value. Annuity trusts aren’t nearly as popular as the unitrusts — there were 15,862 annuity trusts in 2011 — about 17 percent as many as there were unitrusts.
The client needs to maximize the immediate tax deduction. A charitable lead trust might be the best way to minimize immediate income taxes. Under a charitable lead trust, the donor receives an immediate federal income tax deduction when he makes the gift, equal to the present value of the future income stream.
With a charitable remainder trust, the deduction is based upon a complex calculation of the estimated present value of the remainder interest that will ultimately go to the charity. The donor is taxed each year, however, on the value of the income interest that is payable to the charity. There is a nice tax benefit to charitable remainder trusts, though: The client can avoid capital gains taxes on the sale of the assets in the trust. That’s especially beneficial if the trust contains an asset that has appreciated greatly in value, like Apple stock or a vacation home bought in 1974.