A Charitable Remainder Trust is set up in order to achieve both income and estate tax benefits for a donor and the donor's beneficiaries. A properly established charitable remainder trust is eligible for a charitable estate-tax deduction on the decedent's estate tax return.   However, if a charitable remainder trust is generating income that is reinvested by the clients, the projected value of those additional investments needs to be taken into account in order to have an accurate estate projection.   The donor names individuals (which may include the donor) to receive income from the trust for life, with the principal remaining at the donor's death going to the designated charity.   The donor receives an income tax deduction when property is transferred to the trust, and the size of the estate is reduced by a charitable deduction (in the amount of property transferred) at the donor's death.   Naturally, there are restrictions placed on the non-charitable beneficiary's rights to income and the invasion of the trust principal. Only in this way can the designated charity be assured that it will eventually receive the property for which the donor is taking income tax deductions.   Two of the most utilized Charitable Remainder Trusts are the Charitable Remainder Annuity Trust and the Charitable Remainder Unitrust.   What Is a Charitable Remainder Trust (CRT)?     With certain important exceptions, gifts to charity of partial interests in property, (gifts of less than the donor’s entire interest in property), do not qualify for the income tax, gift tax or estate tax charitable deduction. One of the most important exceptions to this "partial-interest rule" is for gifts made to charity through charitable remainder trusts that meet statutory requirements. Charitable remainder trusts may provide benefits for both individuals and charities without violating the partial interest rule.     A charitable remainder trust (CRT) is a unique kind of irrevocable trust in which:     The donor, or one or more individuals designated by the donor, receive(s) income from the trust for life or joint lives, or for a period of up to 20 years, after which the trust terminates and the trust corpus is distributed to the charitable remainderman.     The income payout period may last for more than one life, but the present value of the charitable remainder must be 10% or more of the initial value of the property transferred to the trust. As the income payout period stretches out, (due to young or multiple beneficiaries), the value of charity’s remainder interest shrinks under time-value-of-money principles, potentially jeopardizing the tax-qualification of the trust.       Types of CRTs and General Features     Charitable remainder trusts come in two main forms:     •           charitable remainder annuity trust (CRAT), and •           charitable remainder unitrust (CRUT).     A donor establishes a CRAT by irrevocably transferring cash or appreciated property to the trustee. The trustee is required by the trust instrument to pay a specified annual annuity (at least 5% of the initial value of the assets transferred to the trust, but not more than 50%) to the donor or other designated individual beneficiaries for a certain period of time, often the lives of the beneficiaries, with the trust property passing to a designated charitable institution at the end of this time period.     The value of the charitable remainder must be at least 10% of the net fair market value of all property transferred to the trust, as determined at the time of the transfer. The income beneficiary of a CRAT must receive the required annuity payout each year, even if the trust does not produce any income. Principal may have to be invaded, if necessary to make the required payout.     A CRUT is an irrevocable trust that names a charitable institution as remainder beneficiary, and pays one or more income beneficiaries a specified percentage of the value of the trust assets as revalued each year. If the trust principal rises in value, the income payout also will increase. The specified percentage must be at least 5%, but not more than 50%. The value of the charitable remainder must be at least 10% of the net fair market value of all property transferred to the trust, as determined at the time of the transfer.     While the CRAT comes in only one basic form, the CRUT comes in four sub-varieties:     •           the straight or fixed-percentage unitrust; •           the net-income (without make-up) unitrust; •           the net-income with make-up unitrust (NIMCRUT); and •           the so-called "flip unitrust."     Advantages of CRTs for Donors   Flexible Features   While charitable remainder trusts must be irrevocable to qualify for tax benefits, they are nevertheless attractive to donors because they offer not only current income tax benefits but also a number of flexible planning options that can offset some of the potential disadvantages of irrevocability.     •           A charitable remainder trust may be established either during life (inter vivos) or at death (testamentary).   •           The donor can choose a fixed-income payout (charitable remainder annuity trust) for the individual beneficiary(ies) or a variable-income payout in which the payout amount can grow (or decline!) with trust principal (charitable remainder unitrust).   •           The donor selects the payout rate of the trust, within certain legal limitations (e.g., 5% minimum, 50% maximum, 10% charitable remainder value, 5% probability test for annuity trusts). Once the payout rate is selected, it cannot be changed. By careful selection of the trust’s payout percentage, a donor can elect to optimize the charitable deduction or the payout amount.   •           If a CRUT is used, additional contributions can be made to the trust, if desired, after the initial contribution. Additional contributions cannot be made to a CRAT.     Right to Revoke     The donor selects who will receive the income from the trust; the income beneficiary(ies) may be the donor and/or others. These income beneficiaries cannot be changed once they are selected. However, the donor may retain a testamentary right to revoke these income interests by will to avoid making a completed gift during life for federal gift tax purposes.     Such a retained right to revoke negates a completed gift from occurring until such time as each income payment is made to an income beneficiary. (The donor cannot make a gift to himself, of course, if he/she is the income beneficiary). The gift tax annual exclusion may apply to reduce or eliminate any gift tax for the donor on these annual gifts of trust income to individual beneficiaries if such beneficiaries are deemed to hold present interests in the trust.     Beneficiaries     The income from a CRT may be paid to the income beneficiary(ies) for their lifetimes or for a term of years (not to exceed 20), as selected by the donor. Income may also be paid for the lifetime of beneficiary(ies), to be followed by a term of years.     One charity or several charities may be named as the remainder beneficiary(ies) of the trust.     Further, the donor may retain the right to change the charitable remainderman.     The donor names the trustee, which may be the donor, the charitable remainderman, a third party (e.g., attorney, accountant, relative, etc.), or a financial institution with trust powers. The donor may retain the right to change the trustee.     Investment Discretion     The trustee of a CRT may exercise discretion over the investment of the trust assets, so long as the investment is handled in a prudent and reasonable fashion. The trustee must comply with applicable state laws (e.g., Uniform Prudent Investor Act, Reasonable Man Rule, Reasonable Investor Rule, Principal and Income Acts, Trust Codes) as well as federal laws (e.g., Internal Revenue Code, Philanthropy Protection Act).     As a general matter, the trustee can balance the income needs of the income beneficiaries with the remainder interest (protection of principal) of the charitable remainderman.