Charitable Trust Tax Deduction

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Because a Charitable Remainder Trust is a split interest gift, a portion of the assets used to fund the Charitable Remainder Trust qualifies for a current charitable tax deduction. As with the charitable gift annuity, the charitable tax deduction is based on an actuarial-like calculation involving the duration of the trust, the payout rate and the assumed growth of trust funds. If a donor can’t use the full deduction in the year of the gift, it can be carried forward for up to 5 additional years.

Because a Charitable Remainder Trust is a tax-exempt entity, appreciated property is often used to fund the charitable remainder trust, which is then sold inside the charitable remainder trust “free” of capital gains taxation.

Although the charitable remainder trust is a tax-exempt entity, the distributions made by a charitable remainder trust to a current beneficiary are taxable. The Internal Revenue code uses a four tier system to maximize taxability of distributions. Distributions are classified pursuant to the following priorities:

  • Current year ordinary income and prior years’ undistributed ordinary income.
  • Current capital gains and prior years capital gains.
  • Current year tax-exempt income and prior years’ tax-exempt income.
  • Corpus/return of principal.

Unlike a charitable gift annuity, if the assets of a charitable remainder trust are expended before the trust term ends, the charity has no obligation to fund or provide additional distributions to a current beneficiary (unless it is the trustee and it has breached its duty). Hence, for large retained income gifts, the charitable remainder trust may provide less risk to the charity than a charitable gift annuity.