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The rapid decline in personal wealth and in the financial markets during the past year has caused many to regroup and to rethink the investments and actions they took during much more prosperous times. For those people who created a charitable remainder trust, or CRT, some may be considering ways to extricate themselves from those arrangements, either because they need the stream of income from the CRT sooner rather than later, or because they know that others are in greater need of the trust assets than themselves during this difficult time and want to accelerate the gift to the charitable remainder organization. Fortunately, there are ways of terminating CRTs that can benefit both the individuals and the charities involved.

There are two basic forms for the early termination of a CRT: (1) an assignment termination, involving the assignment by the individual of the unitrust/annuity interest to the charitable remainder beneficiary; or (2) a division termination or "actuarial split," which involves an actuarial division of the assets of the CRT between the individual and the charitable remainder beneficiary based upon the actuarial present value of their respective interests.

An assignment termination is a great option for those who want to put their charitable dollars immediately to work in helping those in need. With the assignment termination, the charitable organization benefits by receiving all of the trust assets immediately. The individual beneficiary also benefits by (1) knowing that the trust assets will be put to immediate use in helping those in need, and (2) in some instances receiving an income tax charitable deduction for the gift to the charity of the remaining unitrust/annuity interest in the CRT.

With an actuarial split termination, both the charitable and the individual beneficiary benefit. Each beneficiary receives the immediate use of his or her respective interest in the CRT. The IRS views the transaction as a sale by the income beneficiary of a capital asset (the income interest), resulting in a capital gain. However, given that many of us have realized substantial capital losses recently, incurring a capital gain may not be problematic. In addition, if a capital gain tax is incurred, it likely will be at a lower tax rate than the rate otherwise charged on the unitrust/annuity payments.

If your client is interested in pursuing a termination of a CRT, specific procedures must be followed in order to avoid various adverse tax consequences associated with the improper termination of a CRT. But if properly done, the early termination of a CRT can be a boon to both your client and the charitable beneficiary.

About Steven D. Anderson, Director Chair, Estate Planning, Trusts & Wealth Transfer

Working with a dedicated team of lawyers, paralegals and staff, Mr. Anderson leads one of the most sophisticated estate planning practices in Northern California. His practice addresses the wealth transfer needs of prosperous individuals and families with multifaceted estates that require innovative strategies to achieve estate planning objectives. Through his many years of experience, Mr. Anderson has designed and implemented virtually every type of estate planning mechanism. He also utilizes his expertise in charitable income and transfer tax issues to advise exempt organizations. Mr. Anderson's understanding of the unique needs of each of his clients combined with the responsiveness that he requires of himself and his staff, make him an invaluable counselor to families, their businesses and foundations, and charitable organizations. His peers throughout Northern California have elected Mr. Anderson to the Northern California SuperLawyers list 2005 through 2007. Mr. Anderson is a member of Silicon Valley Community Foundation’s Professional Advisor League.

About Laurelle M. Gutierrez

As a State Bar of California Certified Legal Specialist in Estate Planning, Trust, and Probate Law, Ms. Gutierrez focuses her practice on the design and implementation of sophisticated estate planning and wealth transfer strategies including planning for multinational families. With more than 14 years of legal experience, she advises her clients on the full range of estate planning issues and techniques, including wills, revocable trusts, irrevocable trusts for lifetime gifts and life insurance, qualified subchapter S trusts and charitable split interest trusts. She also provides post mortem and tax related services such as disclaimer planning, probate and trust administration as well as state and federal estate and gift tax return preparation. She has been selected by her peers for inclusion in Northern California SuperLawyers 2008.

Ms. Gutierrez brings to her estate planning practice the added experience of a transactional real estate and corporate law background.