Charitable Remainder and Special Needs Trust: Combo: An Example of a Win-Win-Win Situation for Parent, Child, with a Disability and Charity

Article excerpt

Say you're getting on in years and, anticipating the time when you're no longer able to do so, want to provide a lifetime of care for your adult child who has a serious disability. You'd also like to make a substantial financial gift to the charity that's been so helpful in providing advice and care for the child over the years. Is there any way you can achieve both goals, and do so in a tax-effective way?

One example, a Charitable Remainder Trust (CRT), when combined with a Special Needs Trust (SNT), creates a powerful combination that can result in a win-win-win situation for the child with special needs, the parent or other trust settlor, and the charity. If structured correctly, the CRT and SNT combo provides (1) the parent with a charitable contribution tax deduction and a reduced income and/or estate tax bill, (2) a steady funding stream to the SNT established for the child's benefit, and (3) a monetary donation to the charity or charities of the parent's choice.

Before you're able to enjoy the benefits gained by combining a CRT with a SNT, however, specific conditions imposed by the Internal Revenue Code and by the IRS must be satisfied.

How the Arrangement Works

If you want to make a gift of money or appreciable property to an IRS-recognized charity, while at the same time providing for a child with a disability or other special need, a 1969 change to the tax code allows you to set up a Charitable Remainder Trust and transfer the property to the CRT rather than directly to the charity. If the CRT qualifies under the tax rules, you'll receive an immediate income tax deduction for the present value of the remainder interest that will be transferred to the charity (IRS maintains tables to help you figure this interest), you'll remove the transferred assets from your taxable estate (and so avoid estate taxes on the assets), and you won't owe any immediate capital gains taxes on the sale of the appreciated assets. And because the CRT must have at least one "non-charitable" beneficiary-meaning a beneficiary that isn't an IRS-qualified charitable organization-reinvestment of the transferred assets can provide a steady stream of payments to a Special Needs Trust established for the child. Upon the child's death, amounts remaining in the CRT will be paid to at least one charitable beneficiary, and any amounts remaining in the SNT will be paid to the child's estate or to charity.

To qualify for these breaks, the CRT must be designed and set up as either a Charitable Remainder Annuity Trust or as a Charitable Remainder Unitrust. If the annuity format is selected, a fixed dollar amount-equal to a percentage of the initial trust contribution- is paid annually to the income beneficiary (in this case, the SNT for the child with a disability). Payments from a unitrust, on the other hand, equal a fixed percentage of the fair market value of the trust's assets, determined annually. In either case, the percentage selected cannot be less than 5%, nor more than 50%, of the contributed assets (in the case of the annuity trust) or of the annual fair market value of the trust (in the case of the unitrust). Note that, under the tax rules, qualified charitable organizations include, but are not limited to, federal, state, and local governments and organizations set up and operated only for charitable, religious, educational, scientific, or literary purposes, or for the prevention of cruelty to children or animals.

IRS Removes Obstacle to Use of Lifetime special Needs Trust with Charitable Trust

In addition to the above requirements, the tax code requires a Charitable Remainder Trust's annual payments to an individual to be made for the individual's life. However, the same law limits the term of the charitable remainder trust's payments to 20 years if a trust, rather than an individual, is named as the CRT's non-charitable beneficiary. This 20-year restriction could have posed quite a problem for parents like you that want the CRT's payments to be made to a special needs trust over the lifetime of their child with a disability. …