Charitable Trusts

The main characteristic of the charitable remainder unitrust is that its payouts are calculated based on a percentage of the size of the principal, or corpus, of the trust. This is as opposed to a using a set dollar amount, as with charitable remainder annuity trusts. IRS tax law generally requires a minimum of 5% of the trust corpus to be paid out annually. However, the IRS allows the percentage payout of a unitrust to be reduced during periods of poor investment performance, thus leading to several different structures for unitrusts.

Charitable Remainder Unitrusts (or uni-trusts) come in four main types:

• Standard Unitrust — This variety of trust pays a set annual amount from the trust assets regardless of how much income is earned by the assets through investments, interest, etc. The payout is generally set to be a particular percentage of the assets held in the trust at the beginning of the measuring year. This has the advantage of creating some stability in income for the person taking payments from the trust, however, it can cause the size of the trust principal (or corpus) to decrease during periods of poor investment performance.
• Net Income unitrust — A net income unitrust pays the agreed amount from the trust so long as the trust investments earn enough to cover it. If the trust performance exceeds the agreed amount, the excess is held over. If the performance is less than the payout, whatever earnings were made are paid, but the principal (corpus) is not reduced in any case. As with a standard unitrust, the base payout is generally a set percentage of the trust assets computed at the beginning of a measuring year.
• Net Income with makeup unitrust — As with a net income unitrust, this type of trust pays the agreed amount from the trust so long as the trust investments earn enough to cover it. Again, if the performance is less than the payout, whatever earnings were made are paid, but the principal (corpus) is not reduced. The difference here is that this type of trust may be created such that it can make up income in later years if the income earned in the current year is less than the base payout rate. This structure can protect the principal of the trust, while providing some long-term stability in payments, albeit with the potential for short-term fluctuations.
• Flip Unitrust — A flip unitrust is similar to a net income unitrust, except that the flip unitrust "flips" to a standard unitrust when a specified date or event occurs. This is most often the birth of a child, a marriage, or the death of the donor, but it can be tied to other events such as the sale of a hard-to-market property or broad financial conditions. This type of trust allows for principal to be maintained in order to provide for higher income when the state event occurs.

Other structures are available as well. In general, trusts are very flexible instruments. If you are concerned about receiving a stable income during your lifetime, you might consider one of the varieties of charitable remainder annuity unitrust. For more information, see the menu to the right.

Charitable Trusts | Privacy Policy | Legal Disclaimer | Contact Us |