More individuals are discovering they can increase their retirement income through what may seem at first an unlikely source: charitable gifts. A certain category of these gifts are known as "life income plans," so called because they pay an income back to the donor. They allow you to take a highly appreciated asset that’s producing little-if any-income, contribute it to charity, and receive back a stream of income that can last for life or for the joint lives of two or more people. Here we examine one of these life income plans-the charitable remainder trust (CRT).
What’s a CRT? It’s a split interest gift, in which the donor, or another individual chosen by the donor, receives income from the trust, with the trust principal (remainder) being distributed eventually to a charity. The income payout from the CRT may last for a term of years-not to exceed 20 years-or it may last for the lifetime of the donor and/or other specified beneficiaries. The trust must make income payouts at least annually. When the trust term expires, the named charity succeeds to the trust principal.
CRTs come in many different forms, but the net income charitable remainder unitrust with a makeup provision (NIMCRUT) and "flip" unitrust are best suited to enhance retirement income.
- NIMCRUTs. A charitable reminder unitrust is unique in that it pays out to the income beneficiary, usually the donor, a fixed percentage of the trust principal as revalued each year. If the income actually earned by the trust is insufficient to make the payout, then principal must be invaded. This result can be avoided with a net income limitation, which reduces the required payout to the trust’s net income when that’s less than the fixed percentage. One variation of the net-income unitrust allows these "income deficits" to be made up in later years of the trust, so the donor/beneficiary merely defers income rather than losing it. This is known as a net-income unitrust with a makeup provision, or NIMCRUT.
- "Flip" Unitrusts. A "flip" unitrust contains special language in the trust document that allows a net-income unitrust-with or without makeup-to "flip" or change to a straight unitrust upon the occurrence of a specific date or a defined event, such as the sale of the original assets contributed to the trust. This option is particularly attractive for the donor who wishes to contribute real estate, closely held stock, or some other non-income-producing asset to the trust. The net-income limitation disappears after the illiquid asset is sold, which can be timed to occur at the donor/beneficiary’s expected retirement date.
- How it works. The donor funds the trust with a non-income-producing asset-real estate, for example. In the year of the gift, the donor receives an income tax charitable deduction based on the present value of the charity’s remainder interest, with any excess deductions taken in the following five years. The trustee holds the non-income-producing assets that have been contributed to the trust, or invests in assets that produce little or no income, until the donor reaches retirement age. When the donor reaches retirement age, the trustee converts the assets into higher income-producing investments and begins the income payouts. Upon the expiration of the trust, the trust property is distributed to the charitable organization.
Be sure to work with your financial advisor and tax attorney when considering the benefits of charitable giving to be certain current laws and regulations are followed. AA!
