The Center for Estate and Gift Planning

Charitable Trust

The charitable lead trust can be a very powerful tool in gift and estate tax planning, but its complexity requires careful consideration of the technical requirements of this form of gift.

Charitable Remainder Trusts

A Charitable Remainder Trust distributes income to a donor or other beneficiaries for their lives or a specified term of years (a maximum of 20 years), with the balance of the trust assets available for Pepperdine's use at the end of the trust.

Charitable remainder trusts offer many opportunities to address specific goals and situations for donors. For example, a charitable remainder trust established for a term of years can assist in funding the costs of attending university. Also, charitable remainder trusts are frequently used as a means of providing supplemental income during retirement, and can be especially attractive as a way to convert appreciated, low-yielding assets into a high-yielding diversified portfolio without incurring capital gains tax. A donor to a charitable remainder trust receives a partial charitable deduction equal to the value of the charitable remainder interest.

Charitable remainder trusts take two basic forms: the charitable remainder unitrust and the charitable remainder annuity trust.

A Charitable Remainder Unitrust pays income based on a percentage of the fair market value of the trust assets as determined annually. Because a unitrust pays a variable amount of income based on the annual market value of the trust assets, this form of charitable remainder trust can be an effective hedge against inflation. When the value of the trust principal increases, so will the donor's income. There are a number of variations of charitable remainder unitrust, including "net income" unitrusts, "net income with make-up" unitrusts, and "flip" unitrusts, which may provide opportunities for the deferral of income.

A Charitable Remainder Annuity Trust pays income based on a percentage of the initial value of the trust and never changes. Since the annuity payment does not change during the term of the trust, an annuity trust provides the certainty of a fixed amount of income each year regardless of any fluctuations in the value of the trust assets.

Charitable Lead Trusts

A charitable lead trust is the mirror-image of the charitable remainder trust. The initial or "lead" interest is for the benefit of Pepperdine University. You transfer assets to a charitable lead trust, which distributes its income to Pepperdine for a term of years. At the end of the trust term, the trust distributes the trust assets to designated non-charitable beneficiaries, usually children or grandchildren (or trusts for their benefit). By establishing a charitable lead trust, the donor is, in effect, "lending" the assets to Pepperdine University for the term of the trust. The benefits of this gift arrangement are primarily the reduction or elimination of the transfer taxes (estate and/or gift taxes) imposed on the transfer of assets to children or others at the end of the trust, and the ability to make a current gift to Pepperdine without giving away your property.