Many times the reasons for an irrevocable trust involve estate and/or income tax avoidance. In order to be successful in such avoidance, the trustor must not have any direct or indirect power or control over the trust property or income. The regulations on this subject, set out in the Internal Revenue Code, must be carefully followed.

What happens to my assets in a trust for a charity if the charity goes out of business before the expiration of the trust?
Your trustee is authorized to name a substitute, if that is the sole charity.

Can I use my insurance to benefit charitable organizations?
Yes. This is an area overlooked by many. You can name one or more charities as alternate or as primary beneficiary. Furthermore, if you no longer need the policy proceeds in your estate for use now, you can transfer ownership of the policy to the charity or charities. If the policy has cash loan value, the charity can draw this out and use it. In this case, you not only receive a charitable gift deduction, but any additional premiums you pay are tax deductible for you now. And, on your death, the charity receives the balance of the policy proceeds and none of it is included in your estate for tax purposes.

Should I name a charity as trustee of my charitable remainder trust?
This is often done if the organization is qualified to so act under local law. The organization's representatives can satisfy you in that regard. Often they will serve without fee, which is an additional incentive.

How can I fund a charitable remainder trust and how is my income calculated?
The usual funding sources for a charitable remainder trust are cash and marketable securities. Real estate and other marketable assets may also be used, though not all charities accept real property such as real estate. Generally, the charity will convert the assets to cash to fund the trust. Each charitable organization will establish what assets it will accept, as there are often time and conversion expenses to assets other than cash and marketable securities.

The income from the trust is based on an annual percentage of the value of the trust. The percentage must be at least 5% (but may be more) of the fair market value of the trust assets. Note the valuation difference in the next question between an annuity trust and a unitrust.

Federal and state income tax deductions are available in the tax year the trust is created. The deductions are based on the age of the donor and the amount (value) placed in the trust. Please check with your tax advisor or development officer concerning the calculation of the deduction.

If the trust is funded with cash, an amount up to 50% of the donor's adjusted gross income in the tax year the trust was established is tax deductible. If appreciated assets such as securities or real estate are used, the percentage of gross income that is deductible is up to 30%. If the value of the trust exceeds the percentage limits of adjustable gross income, the excess may be carried over after the tax year the trust was established and used as deductions in subsequent years (not more than five additional years).

What is the difference between a charitable remainder unitrust and a charitable remainder annuity trust?
The major difference is in the valuation of the assets of the trust, which establishes part of the calculation for the determination of the amount of income received by the income beneficiary(-ies). The annuity assets are valued at the time the assets are placed in the trust. The trust assets are never revalued. Annual payments remain the same, whether the assets appreciate (increase in value) or depreciate (lose value).

The assets in the unitrust are revalued annually. If the trust assets appreciate, the payment to the income beneficiary(-ies) will increase. If the trust assets depreciate, the payment will decrease.