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§ 5.4 CHARITABLE REMAINDER TRUSTSIn appropriate circumstances, it may be preferable to use the income onlytype of charitable remainder unitrust. With this trust, the income paymentsmay be only the actual income (if any) of the trust (up to the otherwise requiredminimum 5 percent of annual value). Additionally, a unitrust may provide forincome payments in subsequent years to constitute or include make-up payments,so as to bring the income payments over the multiyear period involvedto the amounts that would have been paid had the standard fixed percentageapproach been used. This type (or these types) of unitrust is advantageous insituations in which the income generated by the gift property at the time of thegift is not sufficient to satisfy the general payout requirement, and the make-upoption is appropriate when it is anticipated that the income from the propertywill increase or that the trust will be able to dispose of the property and reinvestthe proceeds in more productive assets. Under certain circumstances, anincome-only unitrust or make-up option unitrust can be converted (flipped) toa standard charitable unitrust.Determining the Charitable Deduction. As with the charitable remainderannuity trust, the federal income tax charitable deduction resulting from a contributionby means of a charitable remainder unitrust is determined by use of TreasuryDepartment interest rates tables. Likewise, the deductible portion of thetransfer is ascertained through the determination and application of a factor.Four elements of fact must be taken into account in determining this charitablededuction:1. The age of the income beneficiary (or ages of the income beneficiaries) ifthe term of the trust is measured by a life (or lives), or the term of thetrust, if it is to be for a stated period of years2. The unitrust amount percentage3. The date of valuation of the trust’s assets4. The date or dates during the year when payment to the income beneficiary(or beneficiaries) will be made(d) Tax Treatment of DistributionsA noncharitable beneficiary of distributions from a charitable remainder trust istaxed on the payments in accordance with the types of revenue experienced bythe trust. This tax scheme is represented by four tiers of potential tax treatment,which characterize the amounts paid to income beneficiaries (whether as annuityamounts or unitrust amounts). These tiers are:1. The payments are characterized as ordinary income, to the extent thetrust has ordinary income for the current year and undistributed ordinaryincome from prior years.2. The payments are characterized as capital gain, to the extent the trust hasany capital gain for the current year and any undistributed capital gainfrom prior years. This capital gain will be taxed as ordinary income, 153