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Gift Planning
When you create a charitable remainder trust, you give money, securities or other assets to a trust you create that will then pay you an income for life or for a period of years (not to exceed 20). If you wish, the trust also can pay an income to other beneficiaries of your choice. At the death of the final beneficiary, the remaining balance in the trust goes to Colorado College. You can design your trust to fit your own special needs. First, you decide how much you'd like to put into the trust. Second, you determine the income you'd like to receive from the trust. The rate you select must be at least 5 percent. Usually, the rate selected is 5 percent to 7 percent. The best rate for you will depend upon the number of beneficiaries you select and their ages. Third, you decide which type of charitable remainder trust will work best for you. Choosing a charitable remainder trust is a little like shopping for a new car—the right one depends on your personal needs. Luckily, CRTs come in five variations. We can help you and your professional advisors decide the method that will work best for you.
Which Is Better: Annuity Trust or Unitrust? Now look at the major and wide-ranging tax savings you can realize when you create a charitable remainder trust. First, when you fund the trust, you immediately obtain the benefit of a sizable income tax charitable deduction. This is equal to the present value of the remainder interest ultimately payable to Colorado College. The older the beneficiary, the greater the charitable deduction. You can fund your charitable remainder trust with cash, securities or other property. Highly appreciated assets that generate low current income are ideal for funding. While you'd be reluctant to sell such assets directly because of the tax you would pay on the gain, you can give them to the trust without incurring an up-front capital gains tax. The trust could sell the assets without incurring any tax and then reinvest the proceeds in order to secure a higher current income yield. Perhaps over the years your personal investments have grown handsomely, but you now realize that their yield is grossly inadequate. Unfortunately, if you sell and reinvest in higher yielding securities, you'll lose part of your gain to taxes. The answer? Give your appreciated securities to a charitable remainder trust. In return for your gift, you might get an income two to four times greater than the current dividend from the typical growth stock. Example: Elizabeth, aged 75, owns several stocks with a market value of $100,000, but they pay dividends of only $2,000 a year, or 2 percent of market value. She decides to give these securities to a charitable remainder annuity trust that will pay her $7,000 a year, increasing her gross income by $5,000. If Elizabeth sold her stocks instead, she would pay a tax on her capital gain. Their cost basis is $30,000, compared to the current market value of $100,000, resulting in a gain of $70,000. At a federal capital gains tax rate of 15 percent, the tax would be $10,500. This would leave her with only $89,500 to reinvest, so she would have to find stocks that pay a dividend of more than 8 percent to receive the same $7,000 her trust can pay her.
Click the icon to request a FREE guide to charitable remainder unitrusts. Even More Tax Advantages The tax benefits of a charitable remainder trust don't stop with the charitable deduction and reduction of capital gains tax. You can enjoy other tax advantages, too. Taxation of annual payments. This depends on what type of income your trust earned during the year (or what was undistributed from prior years). Each payment is treated first as ordinary income to the extent of the trust's ordinary income; second, as capital gains to the extent of the trust's capital gains; third, as tax-exempt income to the extent of the trust's tax-exempt income; and last, as a tax-free return of principal. Investment growth, as well as the type of trust (annuity trust or unitrust), will determine the taxation of the annual payments. The point is, part of your income may be treated as capital gains or may even be tax-free. The trustee will tell you what to report, so you don't have to figure this out yourself. If you want to receive tax-free income, you can deposit tax-exempt securities, assuming they meet with the trustee's approval for retention by the trust. But the trust instrument may not require that other kinds of transferred property be converted into tax-exempt securities or that only tax-exempt investments may be made by the trust. Estate tax savings.1 Where you are the only income beneficiary, your charitable remainder trust will be free from federal estate tax. Because of the marital deduction, this is also true if your spouse is a U.S. citizen and the only surviving income beneficiary. If the surviving beneficiary is not your spouse, the life interest of the survivor may be subject to tax, depending on the size of your estate and the available tax benefits remaining in your estate. The value of the survivor's interest is based on that individual's age at your death. But the charitable contribution of the remaining principal, made on a survivor's death, is always tax deductible. Who Can Benefit? Some Typical Cases You may wonder if your circumstances match those of others who decided to create a charitable remainder trust. In fact, people of widely varying ages and financial situations do benefit, as these examples illustrate: An individual nearing retirement. You may have personal investments that are highly appreciated, yet have a low yield. By using these assets to fund a unitrust or annuity trust, you can avoid the up-front capital gains tax trap and supplement your income from a qualified retirement plan. A retired couple or individual between ages 60 and 75. If you have a healthy life expectancy, a unitrust can provide a hedge against inflation over a longer term, assuming the trust investments benefit from a gradually increasing market value that exceeds the usual periodic downturns. An individual over age 75. For you, an annuity trust has a special appeal. You may be more concerned about receiving a fixed and unchangeable income than beating long-term inflation. A single person over age 80. You might find that a unitrust with a term of 20 years is attractive. If you do not survive for the full 20 year period, the remaining payments can be distributed to your children, grandchildren or anyone you designate. Someone supporting an elderly parent. You may be seeking a method to increase a parent's income and also make a philanthropic contribution. A charitable remainder trust can accomplish both objectives. These are only a few of the many ways a charitable remainder trust can help you supplement other sources of income while providing exceptional tax benefits. Choosing the Payout Size As noted earlier, the tax law sets the minimum size of the annual payments to the income beneficiary of a charitable remainder trust at 5 percent. Is there any upper limit on the amount or percentage? A charitable remainder trust must have a payout rate limited to a maximum of 50 percent, and it must have a charitable remainder value of at least 10 percent of the value contributed to the trust. You probably would like to receive a higher payout than you could obtain from other investments. That's understandable. But the payout should reflect a reasonable expectation of the trust's investment performance. If the payout size is larger than the trust's growth in future years, the trust's principal will gradually erode, reducing the charitable remainder. The U.S. Treasury rules base the value of the charitable remainder in part on the payout rate, so the higher the payout, the smaller the charitable value. And, of course, the smaller your anticipated contribution to our future needs. Despite these considerations, you will be pleasantly surprised to see how a charitable remainder trust can increase your income from low-yield investments. Now Add Up Your Benefits Unlike other ways of contributing to us, a charitable remainder trust allows you to keep the benefits of the donated assets for life, knowing you'll help to shape our future later. Look at these personal benefits you can enjoy:
Design Your Own Life Income Plan Copyright © The Stelter Company, All rights reserved. The information in this Web site is not intended as legal advice. For legal advice, please consult an attorney. Figures cited in examples are for hypothetical purposes only and are subject to change. References to income tax apply to federal taxes only. Federal estate tax, state income/estate taxes or state law may impact your results. Planned Gifts Toolbox
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