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 charitable purposes 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 Ole Miss and perhaps other 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
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.
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For example: Marie, 75, 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.
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Here are the results she achieves: |
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Annual
income for the rest of her life (5% of $250,000) |
... $12,500 |
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Capital gains tax when the trust is
created |
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... $0
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(A portion of her annual payments will probably be considered capital
gain or dividends and will be taxed at lower rates.) |
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Immediate income tax charitable deduction*
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... $156,168
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(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.) |
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*depends on IRS discount rate
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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.
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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 over 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.
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