Two kinds of trusts are commonly used in estate planning to accomplish charitable goals at Lawrence (and other charities) and address long-range financial planning objectives. These trusts may be funded with cash, securities, real estate, or other property held by a donor. The Charitable Remainder Unitrust (CRUT) provides a variable income to the beneficiaries equal to a fixed percentage of the trust assets as re-determined annually. A Charitable Remainder Annuity Trust (CRAT) provides a fixed-dollar payout to the income recipient(s). In either case, when the trust assets pass to Lawrence, they are used as agreed by the donor and the college.
Both the unitrust and the annuity trust generate significant tax advantages for the donor. Because an irrevocable transfer of assets for the benefit of Lawrence is involved, a generous income tax deduction is immediately available. In addition, the trust is not subject to capital gains taxes, so securities and other appreciated assets that produce a relatively low income from dividends or other sources may be sold and reinvested by the trustee without diminution -- thus creating more income or permitting faster growth than without the trust. Even though the donor retains income from the trust, the assets placed in it can be removed from the donor's taxable estate.
A well-managed unitrust invested in stable and growing financial markets will normally increase in value through time; accordingly, the annual payments to income beneficiaries will increase also. (Conversely, if market values decline, so will the income.) By comparison, the payments from an annuity trust are fixed and guaranteed so long as the trust exists and has assets to apply to the payments, regardless of the performance of the investment managers or the financial markets.
The payout percentage of either a unitrust or an annuity trust is established when the trust is created and must be at least 5 percent of the trust assets. In the case of the unitrust, a "net income" variation allows the trust to pay either the actual earnings of the trust or the mandated percentage, whichever is less. This variation is useful, for example, where real estate is used to fund a unitrust and a delay may occur between the creation of the trust and the sale of the property. If there is no trust income in this interim period, a "net income" provision would eliminate the need to invade trust principal or to sell at an unattractive price to meet the payment obligations to the beneficiary.
Because a charitable remainder trust is an independent legal entity subject to detailed requirements at creation and during its existence, competent legal advice is essential, and the services of a trust company are advisable. We suggest that alumni and friends considering either kind of charitable remainder trust consult with an attorney experienced in these matters to explore fully the options available to them. If Lawrence is to serve as trustee, a minimum gift of $100,000 is recommended to establish either a unitrust or an annuity trust, and the college must be named as the primary and irrevocable beneficiary of the trust.
Term-Certain Trust
An annuity trust or a unitrust can also be established for a specific number of years (not to exceed 20), rather than for the lifetime(s) of the income recipient(s). This feature can be useful, for example, if you wish to help a child or grandchild with college expenses. The term-certain trust is funded with cash, stock, or real estate, which is then held in trust by Lawrence for the specified period. The income earned by the trust is paid to the individual(s) the donor selects. An immediate income tax deduction is made available to the donor in an amount dependent on the payout rate and the term of the trust. At the end of the term, the corpus of the trust belongs to Lawrence. A minimum of $100,000 is recommended for this arrangement.
For more information about charitable remainder trusts, contact the Office of Development at 800-283-8320, Ext. 6517. Development Staff
