Supporting the Vermont Land Trust through a charitable remainder trust is a generous way to donate a legacy gift to further land conservation. This life-income gift can benefit the donor as well.

Charitable remainder trusts, often referred to as remainder trusts or CRTs, can provide an immediate income tax deduction and return annual income to a donor. Depending on how a donor funds the remainder trust, it is possible to reduce capital gains and even estate taxes.

What is a charitable remainder trust?

A charitable remainder trust is an independently managed account that issues payments to beneficiaries. A CRT may continue either for the lives of the beneficiaries or for a fixed term of up to 20 years. When the trust terminates, the remaining assets will be transferred to the Vermont Land Trust.

CRTs are funded with cash or appreciated property (stock, bonds, land, or other marketable property). The annuity payments will be paid to you or designated beneficiaries on a quarterly, semi-annual, or annual basis until the trust ends.

Many people choose a lawyer or financial institution to serve as a trustee. In some cases, donors have served as their own trustee, although this is generally not recommended. The trustee manages the assets to generate income for the beneficiaries, as well as increase the principal for the charitable beneficiary.

Who should consider a charitable remainder trust?

A charitable remainder trust is most useful when a donor has substantial resources and owns highly appreciated assets that earn a low rate of return (like stock) or cost the donor money to maintain (such as land). Because remainder trusts are more complex than gift annuities, we recommend that donors use them when the gift has a value of at least $100,000 and the income beneficiaries are less than 75 years old.

A CRT will include a charitable income tax deduction for the donor if at least 10 percent of the amount contributed to the trust will ultimately pass to the charity when the donor dies. VLT can make the calculations, factoring in the many variables, to help you determine whether a CRT is the best option to meet your charitable and financial goals.

What are the benefits of a charitable remainder trust?

When assets are transferred to a remainder trust and then sold, no capital gains tax is due on the sale. This enables you to convert a low-earning asset into a higher-earning one without a significant loss of capital due to taxation.

You may take a charitable income tax deduction in the year the trust acquires the asset. The amount of the deduction depends upon:

• The value of the donated property;
• The number and ages of the income beneficiaries; and
• The annual payout-rate selected.

If you cannot use the deduction in the year the trust is established, the unused deduction may be carried forward for up to five years to reduce your taxable income in subsequent years.

Since a remainder trust is not a part of your estate, it may also lower estate taxes.

Upon the termination of the charitable remainder trust, the remaining assets will pass to the Vermont Land Trust without the expense and delay of probate.

Charitable remainder trusts are a generous way to provide significant long-term financial support to VLT as well as immediate income for you and your family.

What are the disadvantages?

The major disadvantage is that the donor and heirs will no longer have access to the trust principal. Therefore, before establishing a charitable remainder trust, donors should consider carefully whether they have other capital resources that will be sufficient to meet the future needs of themselves and their families.

Can I use real estate to fund a charitable remainder trust?

Land can be an excellent asset to fund a remainder trust. Because land that has been owned for a long time is often greatly appreciated, a sale would trigger a large capital gains tax for the owner. When land is used to fund the remainder trust, no capital gains tax is due upon the sale of the land. CRTs often include a clause stating that the trustee will not begin making payments to the income beneficiaries until after the land sells and the proceeds are invested in the trust.

If the land has agricultural, forestry, ecologic, or open space value, then you may want to place a conservation easement on the land before placing it in the remainder trust. Otherwise, the trustee may be required by law to sell the property for its full development value. It is also important to recognize that once real property has been placed in a charitable remainder trust, it can no longer be used personally by you or your family.

How is the payment to the beneficiaries determined?

It depends on which kind of trust to establish:

• A unitrust provides income to a beneficiary as a fixed percentage of the trust’s assets, which the trustee recalculates annually. This payment must be at least five percent of the assets. The actual dollars paid will fluctuate annually as the value of the trust’s assets change. Donors under 75 typically choose a unitrust because they want the potential of receiving extra income if the principal appreciates in value.
• An annuity trust provides income to a beneficiary as a fixed payment that equals or exceeds five percent of the original value of the assets contributed. The annuity trust payment remains constant, regardless of changes in the trust value. Donors over 75 typically prefer the security of a fixed annuity payment.

How are tax benefits determined?

The income tax deduction for a remainder trust is a function of several factors:

• The value of the donated asset
• The type of remainder trust (either an annuity trust or unitrust)
• The annual income rate
• The number and ages of the income beneficiaries (except where a fixed term is used, in which case the number of years in the term)
• The federal discount rate, which is set by the Federal Reserve Board and changes every month.

The Vermont Land Trust can make the calculations, factoring in all the variables, to help you make a decision.

Typically, if there are fewer and older beneficiaries, a donor will receive a greater charitable income tax deduction. The general tax rules that apply to charitable deductions apply to remainder trusts as well. When donors give appreciated property, they may claim a charitable deduction up to 30 percent of their adjusted gross income (AGI). A donor who gives cash can deduct up to 50 percent of AGI. In either case, the donor may carry over any unused deduction for up to five years.

How does a charitable remainder trust compare to a charitable gift annuity?

Charitable remainder trusts are often advisable for donors who wish to make a planned gift with a value of $100,000 or more, but want to retain lifetime control over investment of the assets so they can invest for growth and/or income. In a charitable remainder unitrust, you may make additional contributions to the trust over time as assets and personal objectives permit.

Charitable remainder trusts also work particularly well in situations where the beneficiaries are relatively young, so that the principal and annuity payments may appreciate over their remaining lifetimes.

Conversely, charitable gift annuities work well for gifts between $5,000 and $100,000, when the donor wants to be assured of regular, fixed income payments for his or her lifetime. They often work best for donors age 75 and older, when the security of a fixed annuity payment may be more important than the possibility of future appreciation. Read more about Charitable Gift Annuities.

How do I get started?

Your attorney will prepare the charitable remainder trust document after discussing your preferences for structuring the trust. To assist you and your attorney, VLT can prepare the charitable remainder trust calculations, determine the annual income you will receive from the trust, and the charitable income tax deduction you will receive in the year the trust is created.

Before we can make the calculations, we will need to know the following:

• The age(s) of the donors(s) who are creating the trust;
• The estimated fair market value of the asset you intend to use to fund the charitable remainder trust; and
• Your “cost” or tax basis in that asset.

If you intend to fund the CRT with land, you must obtain a qualified appraisal of the land’s fair market value before the transaction is finalized. You have a 60-day window after the date of the appraisal to complete the transfer of land to the charitable remainder trust; otherwise, you will need an appraisal update (usually in the form of a letter).

If your gift is in the form of securities, we will run the final calculations after the transfer so that we can determine the exact value of the securities on the day of transfer.