Unitrust

A right of property, real or personal, held by one person, the trustee, for the benefit of another, the beneficiary, from which a fixed percentage of the net fair market value of the assets, valued annually, is paid each year to the beneficiary.

A unitrust, also known as a charitable remainder trust, is a legal device defined by federal tax laws that is frequently used by wealthy individuals who wish to make a substantial contribution to a school or charitable organization. To establish a unitrust, a donor transfers property to a trust, while retaining the right to receive payments from the trust for a term chosen by the donor. The payments may continue for the lifetime of the trust's named beneficiaries, a fixed term of not more than twenty years, or a combination of the two. Usually, the term is for the donor's life and the life of the donor's spouse. When the term has ended, the trust estate is paid to a public charity designated by the donor.

The unitrust donor irrevocably transfers assets, usually cash, Securities, or real estate, to a trustee of the donor's choice. The trustee could be the charitable organization that will ultimately receive the assets or a bank trust department. During the unitrust's term, the trustee invests the unitrust's assets and pays a fixed percentage of the unitrust's current value, as determined annually, to the income beneficiaries. If the unitrust's value goes up from one year to the next, its payout increases proportionately. Likewise, if the unitrust's value goes down, the amount it distributes also declines. Payments must be at least five percent of the trust's annual value and are made out of trust income, or trust principal if income is not adequate. Payments may be made annually, semiannually, or quarterly. When the uni-trust term ends, the unitrust's principal passes to the designated charitable organization to be used for the purposes the donor has designated.

A unitrust can be financially attractive to a donor because he is allowed a charitable deduction on his income tax return equal to the present value of the charitable organization's remainder interest in the unitrust, as determined by reference to U.S. Treasury Regulations. The deduction is based on the fair market value of the asset transferred, the payout rate chosen, and either the age and number of beneficiaries or the term of years.

Cross-references

Charitable Trust; Charities.