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6 Things to Know About a Charitable Remainder Trust Payout Rate

6 Things to Know About a Charitable Remainder Trust Payout Rate

December 27, 2022
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When it comes to your charitable remainder trust, you might be wondering just what you can expect to receive when it comes to the payout. After all, this is one of the benefits of establishing this type of trust. 

Unfortunately, the answer isn’t as straightforward as many people hope it will be. Many factors affect the exact charitable remainder trust payout rate that you and your beneficiaries will receive. 

Before you establish this type of charitable remainder trust, here are the six things you need to know about how the payout will work.  

1. The Payout Rate Varies by the Type of Charitable Remainder Trust

The first thing that you need to know regarding the payout of your trust is what type you have or want to establish. 

Charitable remainder annuity trusts (CRATs) have a more straightforward way of calculating the payout to your beneficiary. They pay a specific dollar amount each year, based on the amount that is initially invested into the trust. Generally speaking, this dollar value is at least 5% of the value and does not exceed 50% of the value. 

On the other hand, you may have a charitable remainder unitrust (CRUT). Instead of paying a set dollar amount, it pays a percentage of the value of the trust to your beneficiaries. The percentage paid to the beneficiary or beneficiaries is equivalent to the percentages of the CRAT, at least 5% and no more than 50% of the fair market value of the assets. 

2. Payments Could Be Taxable

One thing that you need to keep in mind is that the payments received from both CRATs and CRUTs are generally taxable since they have often been funded with taxable assets. This means that you will need to report the income on your tax return using a Schedule K-1 form from the trust. 

Any non-charitable beneficiaries who received funds from a charitable remainder trust payout rate will need to claim it as ordinary income if it had ordinary income that year and undistributed ordinary income in the years prior. If ordinary income has already been exhausted, then you may have to pay capital gains tax on the distributions. 

That being said, you can still benefit from a partial tax deduction on the payouts. Contributions that were made to the trust will qualify for partial charitable deductions, limited only by the present value of the remainder interest. In other words, the tax-deductible portion is calculated by the value of the donated property minus the value of the annuity or uni-trust payout. 

3. You Can Split Payments Between Beneficiaries

If you want to name multiple beneficiaries for your charitable remainder trust, this is also an option. The payout from the trust distributed to beneficiaries can be divided among multiple beneficiaries. Of course, the more beneficiaries you add, the lower the dollar amount may be for each one.

This can be especially helpful if you want to gift money to your children and do not want any hard feelings about who receives the most financial gain from your account. 

4. You Can Choose the Payout Schedule

How often do you want to receive the charitable remainder trust payout? There is a great degree of flexibility here in how you can expect to receive payments. Many people opt for an annual payout, but this is far from the only option. You can also receive a payout semiannually, quarterly, or even monthly. 

As long as the annual annuity ranges from 5 to 50% of the value of the assets included, you can choose the payment structure that works best for you and your beneficiaries. This means you can opt to receive a lower payout rate on a more regular basis rather than one large annual payment.

5. You Can Set the Payment Term Length

The payment term on your charitable remainder trust payout is also important to note. You can set a specific term of up to twenty years or select to deliver payouts for the lifetime of one or more of your beneficiaries. There is a great degree of flexibility depending on what you need and want for your beneficiaries.

6. Your Charity of Choice Receives Payment at the End

Whether you opt for a CRUT or a CRAT, the function is much the same in terms of how the charity receives its payment at the end of the term. Once the trust has reached its payment term (either a set term or upon the death of the beneficiary), the charity receives whatever is left in the fund. 

Sometimes, this charity must be established upon setup of the trust, while other times, it can be selected toward the end. 

Keep in mind that your payout to charity must follow the 10 percent rule. This means that to receive the tax-sheltered benefits for the charitable remainder trust, you must make a 10% contribution to the charity or charities of your choice. The contribution must equate to 10% of the present value of the future interest, as calculated using formulae and rates set forth by the IRS.

To simplify things, this means that the remainder of the trust (what is left over after the payments have been made) must be equal to 10% when donated to charity. If you had a $1,000,000 investment, you would need to set aside $100,000 or suffer the financial consequences of missing out on this important contribution. I daresay that 10% is much less than the 30% or more that most taxpayers see on the sale of highly appreciated assets, and especially collectibles.

Make the Most of Your Estate with Magellan

If you are thinking about setting up a charitable remainder trust and want to know more information about the charitable remainder trust payout rate for you or your beneficiaries, trust your finances to the experts. At Magellan, we can help you make the most of your estate with savvy financial moves that offer you extreme tax benefits. Reach out to us today to learn more about how we can help you with your next investment!