By Jeffrey R. Wolfe, Vice President and Manager, Estate Planning Strategies and Affluent Client Services
How to generate income in the current financial and interest rate environment seems to be a hot topic. Everywhere you look financial experts are debating if bonds still can be the answer, is real estate income too uncertain, should one look at alternative methods of income . . .? I don’t purport to know the answer to any of these questions. Sorry.
I do have an alternative idea for you to consider. If you are charitably inclined and you’d like to have an income stream from some assets you’re willing to donate to charity, a charitable remainder trust (CRT) may meet your needs. You should work with a competent estate planning attorney to create the CRT, which will be irrevocable once it is completed (though you can retain the right to change the ultimate charitable beneficiaries).
In the most common CRT plans you retain an income stream for life or a term of years not to exceed 20, and upon your death or the expiration of the term, the charity receives whatever is left. If applicable, your spouse can participate in creating the trust as well and/or can be a participant in the income stream. It’s also possible to name someone else as the participant in the income stream, but doing so is considered a taxable gift for federal transfer tax purposes by you to such beneficiaries.
CRTs require that at least 5% and no more than 50% of the value of the trust be paid back to you as an income stream. Thus, the CRT can generate a measurable income stream for you to utilize for up to the remainder of your (and your spouse’s) lifetime or the term of years you select. These payments can come in the form of a “unitrust”, which means you are paid a fixed percentage of the fair market value of the trust, which is recalculated annually. This allows you to participate in the market increases/decreases of the overall portfolio.
Another payment type is an “annuity” trust where the payout is a fixed amount each year based on the value of the trust in year one. This provides certainty in your income payments, but also provides a fixed payment that will not potentially increase should the value of the underlying assets increase.
There are several legal and mathematical requirements for a CRT to be considered “valid” for tax purposes. Moreover, they can be difficult to administer because they have a complex four-tiered accounting system for the income payments. For more on these issues ask your Benjamin F. Edwards & Co. financial consultant for our strategy report titled “Charitable Remainder Trusts” that provides general information on these issues. You will need to consult with your legal and tax advisors for your specific situation.
One of the many requirements for a valid CRT is for an actuarial calculation to determine the present value of the charitable remainder portion of the CRT when you create it. You can receive an immediate charitable deduction for this portion, which again could help with current income concerns.
It’s important to remember that when you create a CRT, you are parting ways with assets. The remainder of the CRT will pass to charity at the end of the trust term. However, if you’re looking for a sustainable income stream, and you are charitably inclined, consider whether a CRT may fit for your specific situation.