Charitable Trusts Help You Reach Many Goals

The term “trust” can be daunting. In reality, trusts are a very old and flexible planning tool that can be used to accomplish many personal and financial goals. Some rely on trusts to provide for management of assets by a party they trust. Others make use of trusts to delay transfers of property to heirs due to their age or other reasons. Trusts also allow a person to arrange for property to first be put to one use, then to another. For example, a charitable remainder trust offers a way to make a meaningful gift to the University of Memphis after first providing income for yourself and/or others you name.

Here's how a charitable remainder trust works:

• A trust is drafted by an appropriate professional advisor.
• Assets are transferred to the trust to be managed by you or another person or an entity you choose as trustee.
• Payments are made from the trust to you and/or others you name for life or other period of time you determine.
• You are entitled to a federal income tax charitable deduction and may enjoy capital gains tax savings in the year you create the trust. Amounts used to fund your trust may not be part of your probate or taxable estate.
• When the trust ends, its remaining assets become a gift to further the work at University of Memphis. The gift portion is known as the charitable remainder.

A gift with predictable income

A charitable remainder annuity trust is a way to make a gift while assuring a fixed, regular income. Income from such a trust can be a reliable income supplement in retirement years. 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. 

*If the University of Memphis serves as trustee, income beneficiary must be at least 65 years of age.

Example

George, 75, decides to place $250,000 in a charitable remainder annuity trust. The trust is funded with stocks that cost $100,000 and are yielding 1%, or $2,500, per year in income.

George decides to provide for lifetime payments from the trust of 5% of $250,000, or $12,500, each year regardless of the actual earnings of the trust. This will result in a substantial increase in income while making a significant charitable gift in the future.

To summarize the benefits received:

1. A fixed and predictable annual income for life of (5% of $250,000) $12,500.
2. No capital gains tax is due when assets transferred to trust are sold. (A portion of the annual payments may include some of the capital gain and may then be taxed at lower rates.)
3. An immediate charitable income tax deduction of over $140,632. (The charitable income tax deduction may be carried forward for as many as five years if the deduction is more than can be used in the year of the gift.)

A gift with variable income

Like the annuity trust, the charitable remainder unitrust provides for a gift that allows a donor to retain needed income. But unlike the annuity trust, the income from a unitrust can fluctuate over time with the value of the assets placed in the trust.

You determine the annual payment 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. If provided for in the trust agreement, additions can be made to a unitrust, and an additional tax deduction is allowed for part of any additional amounts contributed.

For those who would like to provide for an income that can grow over time, the charitable remainder unitrust could play a welcome role in long-range plans. Another benefit of charitable remainder trusts is the fact that no tax is payable by the trust at the time investment gains are realized, making it possible to enjoy increased income over time based on tax-free growth within the trust. This can be especially attractive to those who anticipate steady increases in growth in investments over time. 

Example

If George had instead chosen a unitrust paying 5%, the first year the income would be 5% of  $250,000, or $12,500. Next year, if the assets are worth $275,000, the trust will pay $ (5% of $275,000). If the value of the assets is less next year, the trust income will adjust by a corresponding percentage.

Like the charitable remainder annuity trusts, capital gains tax is avoided at the time the trust is created. The charitable remainder unitrust can be an excellent way to provide for more income today with the possibility of more growth if trust investments increase in value in future years.

To summarize the benefits received:

1. A lifetime income of 5% of the amount of the trust assets as valued each year. The first year he would receive 5% of $250,000, or $12,500.
2. No capital gains tax is due when assets transferred to trust are sold
   (A portion of the annual payments may include some of the capital gain and may then be taxed at lower rates)
3. An immediate charitable income tax deduction of over $248,658. (The charitable income tax deduction may be carried forward for as many as five years if the deduction is more than can be used in the year of the gift.) 

Description	Annuity Trust	Unitrust
First Year Income	$12,500	$12,500
Annuity and Payout Rate	5%	5%
Type of Income	Level	Variable
Charitable Deduction	$140,632	$248,658
Maximum Payout Rate	6.45%	35.4%
10% Remainder Test	Passed	Passed
5% Probability Test	Passed	N/A