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Charitable Trusts Help You Reach Many Goals

Trusts are very flexible planning tools that can be used to accomplish a wide range of goals. Some people rely on them to reduce property management chores. Others use trusts to delay distribution of property to heirs on account of their age or other reasons.

Trusts also allow a person to arrange for their property to first be put to one use, then to another. A charitable remainder trust offers a way to arrange a meaningful gift for Junior Achievement while first providing income for yourself and/or others you name.

Here’s how a charitable remainder trust functions:

You, as the donor, create a trust, drafted by an appropriate professional advisor.
Cash or other property is transferred to the trust to be managed by you or another person or an entity you choose as trustee. The trustee manages the property for you, your spouse, and/or other beneficiaries you choose.
Each year, payments are made from the trust to you and/or other beneficiary(ies).
You receive an income tax charitable deduction and may enjoy capital gains tax savings in the year you create the trust.
Payments continue until the trust ends. The trust document specifies the time when this is to occur, such as at the death of the last beneficiary or after a stated period of time.
When the trust terminates, its assets become a gift to one or more charitable interests of your choosing. The gift portion is known as the charitable remainder.

A Gift With an Income That Never Changes

A charitable remainder annuity trust is a way to make a gift to Junior Achievement while receiving a fixed, regular income. Income from such a trust can be a reliable supplement to other income in retirement years. Through the use of this planning tool, professional management of assets can also be achieved for you and/or surviving loved ones. The payments received each year must be at least 5% of the amount originally placed in the trust. You determine the exact amount when your trust is created.

For example: Marie, 72, decides to place $250,000 in a charitable remainder annuity trust. She funds the trust with stocks that cost $100,000 and are yielding 1%, or $2,500, per year in income.

Marie provides that her trust will pay her 5% of $250,000, or $12,500, each year regardless of the actual earnings of the trust. She is pleased to be able to substantially increase her income while making a significant charitable gift to Junior Achievement.

Here are the results she achieves:

Annual income for the rest of her life (5% of $250,000)

... $12,500

Capital gains tax when the trust is created

... $0

(A portion of her annual payments will probably be considered capital gain or dividends and will be taxed at lower rates.)

Immediate income tax charitable deduction*

... $133,380

(Her deduction may be carried forward for as many as five future years if amount is more than can be deducted in the year of her gift.)

*depends on IRS discount rate

A Gift With a Fluctuating Income

Like the annuity trust, the charitable remainder unitrust provides for a gift while a donor retains income. But unlike the annuity trust, the income from a unitrust can fluctuate with the value of the assets placed in the trust.

You determine the annual payout percentage when the gift is made. Each year this percentage (at least 5%) of the value of the trust assets is paid to you or others you name. When the value of the investments goes higher, more income is received. The income will be less if the value of the assets declines. Additions can be made to this trust, and a tax deduction is allowed for part of each amount contributed.

For those who have reached the limit that can be deducted for contributions to Individual Retirement Accounts (IRAs) and other retirement plans, the charitable remainder unitrust could play a welcome role in building additional income for retirement years.

For example: If Marie had instead chosen a unitrust paying 5%, the first year she receives $12,500. Next year, if the assets are worth $275,000, her income rises to $13,750 (5% of $275,000). If the value of the assets is less next year, her income will be reduced by a corresponding percentage.

She is entitled to a deduction equal to about half of the amount with which she funds the trust. She also avoids capital gains tax at the time the trust is created. The charitable remainder unitrust can be an excellent way to provide for an income today with the possibility of future growth for those who believe that investment assets will grow in value in future years.