Annuity Trusts

An annuity trust is similar to a unitrust in that the donor’s gift property is held in trust by a charity institution, payments are made to the income beneficiaries for the term of the trust, and then the remaining corpus (and undistributed income if any) is paid to the charity or other charitable affiliate. The principal distinctions of the annuity trust are (a) that the periodic payment is specified as a fixed dollar amount at the time the trust is created, and (b) that the payment must be made whether or not the trust has income, even to the point of exhausting the corpus if necessary. If the trust corpus is exhausted, neither the trustee nor the charitable remainder beneficiary (e.g., the charity) has an obligation to continue paying the annuity amount. Although this is very unlikely, it is a feature of an annuity trust that has the potential for donor/beneficiary dissatisfaction. To minimize the risk of such problems, it is common to restrict annuity trusts to cases where the gift property is productive and/or marketable, and the payment amount would not likely erode the corpus during the expected term of the trust.

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