I received this question from J.R., of Woodbury, N.Y., who wrote:

My wife and I read your article about Charitable Remainder Trusts (Sonny Bloch's Action Line, January, 1994) with great interest. While our assets are modest, we want to make this type of contribution because of the help the charity has provided. What is the difference between a Charitable Remainder Annuity Trust and a Charitable Remainder Unitrust?

Dear J.R.:

Funding a Charitable Remainder Trust is a fantastic way to contribute to your favorite charity! It allows you to perform a good deed while saving on both income, and estate and gift taxes. And, with Charitable Remainder Trust's you are able to pass substantially more asset to the charity.

The best asset to donate is one which has greatly appreciated in value. The charitable nature of the trust allows the sale of the asset to avoid capital gains (income) tax, which donates the asset at fair market value instead of reduced by a tax bite which, in New York State, may exceed 40%. At the same time, you are entitled to a current income tax charitable deduction determined by a formula based upon the asset's full fair market value and which equals the amount of the present value of the remainder interest.

The asset is withdrawn from your taxable estate and therefore reduces your estate tax. From the time of its donation, any appreciation in the asset is also withdrawn from your taxable estate, with similar reduction of tax.

A Charitable Remainder Trust will benefit you or you and another (usually a family member), every year for a fixed term or for life. Any income shifted to a family member may thereby be taxed in a lower bracket. In each type of trust, the income must be at least 5 percent of the value of the trust every year. Some donors use the cash flow to fund a Wealth Replacement (Irrevocable Insurance) Trust.

The Charitable Remainder Annuity Trust is one which pays a fixed percentage of the value of the property at the time it is transferred. This is good for someone who needs a fixed yearly income because the cash flow from this trust is known in advance. Please note, this trust is not popular during inflationary times due to its inflexibility.

The Charitable Remainder Unitrust, on the other hand, is one which will pay a varied amount depending on changes in the annual value of the trust fund. This is good for someone who doesn't count on current income because the cash flow from this trust fluctuates depending upon investment growth of the assets in the trust.

These Trusts, and their extraordinary opportunity to save on income, and estate and gift taxes, are specifically allowed (and even encouraged) by the Federal government through the Internal Revenue Code, so feel comfortable in using them. In these austere times, charities are seeking any assistance you can provide. So, whatever property you donate, you can rest easy knowing you have helped others.