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Charitable Remainder Unitrust
With a charitable remainder unitrust the income payout is a fixed percentage of the fair market value of the assets in the trust as determined each year. The payout percentage must be at least 5% and no more than 50%. The higher the annual payout percentage the lower the charitable deduction. Unitrusts can be established through a will. These are known as testamentary unitrusts.
Types of Charitable Remainder Unitrusts
- Straight (standard) unitrust - annually pays stated percentage of fair market value.
- Net income only (seldom used) trust distributes annually the lesser of the stated unitrust payout rate or the net income of the trust.
- Net income makeup trust distributes annually the lesser of the stated payout rate or the trust’s income. However, if the trust does not earn sufficient income to make the unitrust payment, it can make up the shortage in the future when the trust earns more than the unitrust amount.
- Flip - starts out as a net income makeup but upon a triggering event flips to a straight unitrust. The flip occurs the first day of the taxable year after the triggering event.
Benefits of a charitable remainder unitrust
- Increased income - hedge against inflation.
- Avoidance of capital gain.
- Diversification of the investments.
- Current charitable deduction for income tax purposes.
- Possible estate tax deduction.
- Additional contributions can be made to the unitrust during donor’s lifetime.