The assets in a Charitable Remainder Trust are managed by a trustee designated by you. Two types of Charitable Remainder Trusts exist: a Unitrust and an Annuity Trust.
A Unitrust generates life income or term-of-years income for you based on a fixed percentage of return (5 percent minimum). Unitrusts permit an immediate tax deduction based on the payout percentage selected and the number and ages of the income beneficiaries. Gifts may be made in cash, appreciated stock or real estate - the latter two generate a bypass of capital gains. A Unitrust may have future asset additions to its corpus. This can be especially attractive if the donated asset has good potential for future appreciation.
Benefits of a Charitable Remainder Unitrust
Percentage Unitrust - The annual income paid to the income beneficiary is not fixed at a specific dollar amount, but rather is a percentage of the asset value, usually between 5 and 7 percent.
- Provides for income growth as the trust assets grow in value.
- If the trust income exceeds the payment required to income beneficiaries, the excess is added to the principal.
- If the payments required to income beneficiaries exceed the income of the trust, a portion of the trust principal (including accumulated gain) will be distributed.
- Counters the effects of future inflation.
Net Income Unitrust - Provides greater income flexibility because it provides for payments of either a fixed percentage (at least 5 percent) of the trust's annual value or the net income of the trust, whichever is less.
- Particularly well suited for the younger donor who does not need large income payments now but who wants to allow the trust value to increase over time so that it pays higher amounts in later years.
- Avoids the necessity of distributing trust principal while trust income is low and, in some forms, builds up "income credits" for the future.
Example of a Charitable Remainder Unitrust
Mr. and Mrs. Smith, both age 50, are in the 35 and 15 percent federal income tax brackets for ordinary income and long-term capital gains. They own stock worth $500,000, for which they paid $50,000 many years ago, and which they would like to sell. To do so would incur federal capital gains tax of $67,500. They want to make a gift to the REF They are not interested in receiving much income now, but they may need it later.
They transfer the stock to a 5 percent REF net income unitrust. Their charitable contribution deduction of about $93,600 (based on an IRS discount rate of 4.6 percent) gives them an immediate federal income tax savings of roughly $32,700, and they avoid paying immediately the $67,500 federal capital gains tax. Their net cost of establishing the $500,000 trust (as opposed to selling the stock and reinvesting the proceeds) is approximately $399,700.
Until the Smiths are in need of income, the trust assets can be invested for capital growth. Later, such as after retirement, when Mr. and Mrs. Smith would like more income, the trust assets can be invested for the production of income, resulting in a greater payout to them. If they have included a "make up" provision for the trust, and trust income in the later years exceeds 5 percent, Mr. and Mrs. Smith will also receive the excess income until all amounts necessary to "make up" for shortfalls in the payment of 5 percent of the value of the trust in earlier years have been paid.
Charitable Remainder Annuity Trust
An Annuity Trust generates life income or term-of-years income for you based on a fixed dollar amount which never changes (5 percent minimum).
Benefits of a Charitable Remainder Annuity Trust
- Provides a fixed income for life and then supports the Stanford educational program of the donor's choice.
- The annual dollar amount paid is mutually agreed upon by donor and the REF when the trust is established. The amount selected is usually between 5 and 7 percent of the initial fair market value of the property transferred to the trust.
Example of a Charitable Remainder Annuity Trust
Miss Smith, age 80, owns securities worth $300,000, which she bought many years ago for $20,000 and which pay a total cash dividend of $6,000 (2 percent). She is in the 35 percent income tax bracket and the 15 percent bracket for capital gains taxes. She would like a greater current return on her securities, but has hesitated to sell the stock because of the $42,000 in capital gains tax that would be due.
By transferring her shares to an REF charitable remainder annuity trust with a 7 percent payout, she increases her current income to $21,000 and avoids paying any immediate federal capital gains tax, even if the foundation should subsequently sell the securities. In addition, she receives a charitable income tax deduction of almost $164,000 (based on an IRS discount rate of 4.6 percent).
Through the charitable remainder annuity trust gift, Miss Smith is able to supports the REF mission that she values, while also providing herself higher income for her lifetime, at an effective cost of just over $200,000.
