A charitable remainder annuity trust is a trust from which a specified sum or percentage (not less than five percent of the initial fair market value of all assets actually placed in trust) is to be paid annually to one or more named individuals as income beneficiaries.
Timing of Trust
For transfers in trust occurring after June 18, 1997, the annual payout cannot exceed 50 percent of the initial fair market value of the trust’s assets. For transfers in trust occurring after July 28, 1997, the value of the remainder interest must be at least 10 percent of the initial fair market value of all property placed in the trust.
However, under a special rule, the minimum 10 percent rule will not apply to transfers in trust under the terms of a will or other testamentary instrument executed on or before July 28, 1998, if the decedent:
1. Dies before January 1, 2000, without having republished the will or amending it by codicil or otherwise; or
2. Was on July 28, 1997, under a mental disability to change the disposition of the property and did not regain competency before dying.
Each one of the beneficiaries must be living at the creation of the trust and payments to them must terminate not later than 20 years after creation or at their deaths. When payments terminate, the remainder goes to the charitable organization.
“James died, leaving $100,000 in trust. If his surviving spouse, Jessica, were to receive $6,000 a year for 15 years ($90,000), with the remainder to go to charity, this would be a charitable remainder annuity trust.”
The beneficiary is taxed under the trust conduit rules as the case may be. The trustee will furnish information on the tax status of the receipts.