Investment strategies unique to assets held in charitable remainder trusts.

Most charitable remainder trust assets are invested using traditional asset allocation models, with significant amounts of assets invested in debt securities. Certain charitable remainder trusts possess unique characteristics that cause the traditional asset allocation models to be less than ideal when applied to their investment portfolios.

While a donor to a charitable remainder annuity trust (CRAT) or a charitable remainder unitrust (CRUT) and the charitable remainder beneficiary appear to have conflicting vested interests in the trust (high after-tax income versus a high remainder value), the optimal investment strategy for both the income beneficiary (the donor) and the remainder beneficiary (the charitable organization) is one that emphasizes asset growth.

When the trust realizes a capital gain, the trust's income beneficiary typically receives a high payout, with the benefit of receiving the lower capital gains rates on the amount of the payout in excess of the trusts ordinary income for the year (assuming ordinary income from previous years has been distributed). The receipt of capital gain income by the income beneficiary may be especially desirable in light of recent political developments that favor a decrease in the capital gains rates.

The charitable beneficiary also prospers under the "investing for growth" strategy; investments in equities historically have outperformed all other types of investments (given a sufficient time frame), with much of the growth attributable to growth in asset value rather than income. Therefore, investing in low-income paying, high-growth equities could result in a positive outcome for both the income beneficiary and the remainder beneficiary.

Even if the investment strategy is not growth-oriented, investing trust assets in tax-exempt securities should be avoided in almost all cases because of the unique tax structure of charitable remainder trusts. Charitable remainder trusts typically are funded with appreciated securities or real estate. When an appreciated asset is sold within the trust, the character of the income. received by the income beneficiary will not be considered tax-exempt until the current and prior ordinary income earned by the trust and the entire realized capital gain have been recognized by the donor for tax purposes. Therefore, the trust could potentially earn income at the lower yields provided by tax-exempt securities without the income beneficiary receiving an offsetting income tax benefit.