CRT DESCRIPTION ARTICLE

<h3 align="center">THE CHARITABLE REMAINDER TRUST - Technical Explanation</h3>
<h3>Summary: A Good Source of Retirement Income; <?xml:namespace prefix = st1 /><st1:street w:st="on"><st1:address w:st="on">A Good Way</st1:address></st1:street> to Avoid Capital Gains Taxes on the <st1:city w:st="on"><st1:place w:st="on">Sale</st1:place></st1:city> of an Asset and a Nice Way to Give Money to Charity</h3>
<h3>By Nathaniel E. Clement<?xml:namespace prefix = o /><o:p></o:p></h3>
What is a Charitable Remainder Trust? A Charitable Remainder Trust (CRT) is a trust that can enable you to simultaneously sell an appreciated asset without incurring capital gains taxes, make a charitable gift, enjoy a tax deduction, remove assets from your estate, and generate income for yourself, your family, or anyone else you choose - for life, or for a specified period of time determined by you. CRTs are authorized by Congress under Section 664 of the Internal Revenue Code. Upon your death (or, if you desire, upon the death of you and your spouse, or, if you desire, upon the death of you, your spouse, and some other beneficiary), the assets remaining in the trust pass to the charity(ies) you have specified any 501(c )(3) organization even your own family foundation. <o:p></o:p>
 What are the Benefits of a Charitable Remainder Trust? Increased Income By donating to the trust an asset that produces little or no income (for example, raw land or a low dividend stock), then selling that asset and purchasing a portfolio of higher yielding investments, you can measurably increase your income from that asset.<o:p></o:p>
Thats because the trust will pay you a payout amount every year. How this is determined is discussed below.<o:p></o:p>
Tax Benefits Income Tax Deductions: Contributions to qualified 501(c)(3) organizations, as described under the Internal Revenue Code, are usually tax-deductible. The amount of your tax deduction will depend on several factor: (i) the value of the asset you contributed to the CRT; (ii) the payout percentage rate that you selected; (iii) the age of those receiving payouts from the trust (for example your age, or your and your spouses ages); and (iv) the discount rate that is in effect the month you make the contribution to the trust (the IRS publishes the rate each month). No Immediate Capital Gains Tax: Assets contributed to the trust can be sold by the trust without any capital gains taxes to you. This is especially important if you have a highly appreciated asset in your personal portfolio. This could include stocks, bonds, mutual funds, real estate, collectibles or artwork. You can usually take a tax deduction based on the asset's full market value. Hence, not only do you avoid paying capital gains tax, but the size of your tax deduction is equal to a percentage of what you paid for the asset plus its increased value. Federal Estate and Gift Tax Savings: A CRT can save you substantial amounts of estate and gift taxes (which can be as high as 48%). Assets in the CRT are not subject to yours or anyone elses estate and gift taxation. Other Benefits Diversification: By contributing one large asset (such as real estate or shares in one stock) and having the trust purchase different types of investments, you can take advantage of one of the key principles of investing: diversification. A well-diversified investment portfolio will reduce volatility, produce more dependable gains, and provide more consistent income. A Personal Or Family Legacy: A charitable trust can serve as a key component to a successful estate plan. As the creator of the trust, you can enjoy the personal satisfaction and recognition that comes from contributing to a worthy cause in your community - your house of worship or an educational institution of your liking - without giving up the benefit of lifetime income from the wealth that you have worked so hard to build. Moreover, a CRT can often be tied to testamentary family foundations that your children or other beneficiaries can manage for years to come. Protection From Creditors: Many individuals are justifiably concerned about protecting their assets from potential creditors. By contributing assets to an appropriately drafted trust, you can receive all the benefits of a CRT while protecting the assets producing the payout to you from any future claims. In other words, your personal creditors cannot penetrate the walls of the CRT to get to the assets within the trust. Types of Charitable Remainder Trusts
<div class="Section1">There are two main types of CRTs: the Charitable Remainder Unitrust and the Charitable Remainder Annuity Trust. 1. The UNITRUST: The charitable remainder unitrust pays a set percentage of the trust's value every year as a distribution to you (or to others that you name). The percentage is set up at the time that the trust is created. The percentage rate you pick may be no less than 5%. The payout (lets say you pick 5%) to you is calculated at the start of each year. You take the fair market value of the portfolio of the CRT as of January 1 (or December 31st preceding). You multiply that value times 5%. The result is the unitrust amount. The unitrust amount must be paid to you during that year. You can select (in the trust document) an annual payment, semi-annual payments, or quarterly payments. <o:p></o:p>
One of the nice things about a unitrust is you can make additional contributions to the trust anytime you want.<o:p></o:p>
Following the death of the payout beneficiary(ies) or at the conclusion of the term of the trust, the remaining property of the trust passes to the charity(ies) or foundation(s) that you have specified. 2. The ANNUITY Trust: The charitable remainder annuity trust provides a set dollar amount each year to you and to those you name as payout beneficiaries. The annual payment must be at least 5%. The payout amount in this case is called the annuity amount. The annuity amount is determined ONE TIME at the beginning of the trust. It is not recalculated annually as is the case with the unitrust. For example, lets say you contribute raw land to the CRT. You select a 6% payout rate. You get the land valued and the appraiser says it is worth $200,000. Your annuity amount will be $12,000 annually for life (6% x $200,000). You (or you and your spouse, or you and other selected beneficiaries) will receive $12,000 each year for life or lifetimes. There is a danger, of course, that if you pick a payout rate that is too high, you will exhaust the trust. The IRS recognizes this, so the trust, up-front, must satisfy a mathematically determined test that there is a 5% or less probablility that the trust will run out of money. (Most good estate planning attorneys can quickly determine if your contemplated trust passes this test.)<o:p></o:p>
When the trust terminates, the remainder of the trust passes to the charity(ies) or foundation(s) that you have named. <o:p></o:p>
A disadvantage to the annuity trust is that you may NOT make additional contributions to the trust. How Does the Tax Advantage of a CRT Work? Here is an example: Jake Johnson, age 59, owns a non-dividend paying stock which he received from a trust years ago after the death of his mother. The stock is now worth $100,000, but has a cost basis of $10,000. Jake and his wife, Joan (also age 59), wish to diversify their portfolio, increase their income, and create tax deductions. They are in the 36 percent federal and state tax bracket. Jake and Joan establish a CRT established as a unitrust. They chose a unitrust because they are concerned about inflation and want to get increased distributions from their trust as the years go by.<o:p></o:p>
Jake donates the stock to a charitable remainder unitrust with a 5% payout rate for the joint lives of Jake and Joan. Based on their ages and the payout rate, Jake and Joan will be entitled (assuming the gift to the trust was in September of 2004) to a charitable income tax deduction of $27,748. On their income tax return, this will give them tax savings of $9,989. Further, assuming the trust sells the stock and invests in a high-quality growth and income fund earning an average annual return of 8 %, John and Mary will receive a growing stream of payments from the trust. Since their payout rate is 5% ($5,000), the trust is estimated to grown by 3% per year, which means they will get a pay increase each year going forward. If the investments of the trust decrease in value or grow by less than 5% then, in that particular year, their payments will decrease. Jake and Joan understand that and are comfortable with that risk. As an alternative (one of many), Jake structures the trust to pay out to him only (not to Joan) 6% per year. Now Jake will get a charitable deduction of $32,890. This will produce a charitable deduction for Jake of $11,840, which he will report on his joint tax return.<o:p></o:p>
What if Jake and Joan Dont Need all of the Payout Amount Paid to them Each Year?<o:p></o:p>
Then, I suggest that they use the payout amount (all or a portion) to purchase life insurance to be owned by a life insurance trust (ILIT) The life insurance trust can then pay off at the death of Jake and Joan to the children completely tax-free. If they buy a $100,000 second-to-die policy, the children will receive the $100,000 with no taxes no income taxes and no estate taxes. The $100,000 to the children can be structured to be in Protected Trusts, so the money will be forever protected from the childrens creditors, be divorce proof, be lawsuit proof, and even have values important to Jake and Joan built into the Protected Trust.<o:p></o:p>
These and many other goals can be achieved with a CRT. <o:p></o:p>
OTHER FREQUENTLY-ASKED QUESTIONS:<o:p></o:p>
QUESTION 1: What if I change my mind about the charities that I have designated in my CRT? Not a problem. The law allows you, the trustmaker of the CRT, to redesignate the charities at any time during your lifetime. Unfortunately, many standard or boiler plate CRT documents fail to give the trustmaker this right.<o:p></o:p>
QUESTION 2: I have selected a payout rate of 6% from my trust. I now want to raise the payout rate to 8%. May I do that? No, the rate that you pick is fixed and cannot change.<o:p></o:p>
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Nathaniel E. Clement, 2007
<st1:address w:st="on"><st1:street w:st="on">1709 Legion Rd., Ste 214</st1:street>, <st1:city w:st="on">Chapel Hill</st1:city>, <st1:state w:st="on">N.C.</st1:state></st1:address> 27517<o:p></o:p>
(919) 929-9298<o:p></o:p>
This article may be reprinted or photocopied if done so in its entirety.<o:p></o:p></div>

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