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For many, the topic of financial planning, and more specifically the mere thought of estate planning, conjures feelings of anxiety and stress. But planning well for your family’s future while also preserving charitable giving priorities don’t have to be complicated or competing issues. There are, in fact, some relatively simple giving vehicles that can help accomplish both objectives. To determine whether these solutions may be right for you, consider the following checklist.
If you checked even one of the boxes above, you may wish to consider using your appreciated assets to establish a Charitable Remainder Trust (CRT). In the right circumstances, this instrument can increase income, reduce taxes, unlock appreciated investments, eliminate investment worries and ultimately provide very important charitable support.
Some of our donors have been very interested in making gifts through a CRT so that they may provide a larger contribution to Bluefield College than would be possible through an outright gift. Read on to learn more about charitable remainder trusts, which can provide future benefit for Bluefield College and current financial benefits for the donor.
A trust is a legal entity established by an individual to set aside specific assets to be used for specified purposes over time. The trust is managed by a third party, such as an individual, a bank or, in some cases, an institution such as (name of Bluefield College). There are a variety of trust arrangements. One of them is the charitable remainder trust.
Charitable remainder trusts are designed to enable a person to continue receiving the earnings from his or her assets for life, without management worries, while also making a significant gift to Bluefield.
When you create a CRT, you will transfer money, securities or other assets to an irrevocable trust. This removes the asset(s) from your estate and therefore, if structured correctly, no estate taxes will be due on it when you die. You will also receive an immediate charitable income tax deduction. The asset(s) is transferred to a trustee—it could be an individual or a bank, trust company, or charitable organization. The trustee then sells your asset(s) at full market value, paying no capital gains tax, and re-invests the proceeds in income-producing assets.
For the rest of your life, or a period of pre-determined years, the trust will pay you an income. If desired, the trust also can pay income to your spouse. At your death, or the death of the surviving beneficiary, the remaining principal in the trust goes to one or more charities. That’s why it’s called a charitable remainder trust.
The trust can be designed to fit your unique needs. First, you must decide how much to place into the trust. Second, you must determine the income you would like to receive from the donated assets. The selected rate of income return must be at least 5 percent. Usually, the rate selected is 5 percent to 7 percent. The best rate will depend upon the number of beneficiaries selected and their ages. Third, you decide whether an annuity trust or unitrust will work best.
Choosing a CRT depends on your personal needs. Bluefield College can help you and your professional advisors decide which of the options below might work best for you.
The annuity trust may be advantageous if you want to be certain of the dollars received year-to-year. If you are concerned about the possibility of recessionary times and falling market values, the annuity trust may have greater appeal. Although you cannot add to this annuity trust later in order to increase income, you can create a new trust for that purpose.
A unitrust may be a hedge against inflation. If you foresee economic growth resulting in appreciation of the trust's assets, a unitrust is the best option. The valuation can rise or fall, but over time a well-managed unitrust may offer better protection of purchasing power than fixed dollar payments. A further advantage is that if you want to enlarge the trust later, you can make additional contributions without the cost of creating and administering more than one trust.
There is also a variation on the standard unitrust that pays the lesser of the trust’s earned income at the stated percentage payout each year. We can explain this option – if you are interested, feel free to contact us.
Now consider the major and wide-ranging tax savings realized by the creation of a CRT.
First, when the trust is funded, 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 Bluefield College, and is based on Internal Revenue Service life expectancy tables and current interest rates. The older the beneficiary, and the lower the income payout (minimum of 5% is required), the greater the charitable deduction.
Highly-appreciated assets that generate low current income are an ideal funding medium. While you may be reluctant to sell such assets directly because of the tax you would pay on the gain, you can transfer them to the trust without incurring the capital gains tax. The trust can sell the assets without incurring any tax and then reinvest the proceeds in order to secure a higher current income yield (provided that there is absolutely no prearrangement of any such sale).
Perhaps over the years your personal investments have grown handsomely, but you realize that the yield is inadequate. Unfortunately, if you sell and reinvest in higher-yielding securities, you would lose part of any such gains to taxes.
The alternative? Transfer the appreciated securities to a CRT. In return for the gift, you might receive income two-to-four times greater than the current dividend from the typical growth stock.
Example: Mary, age 73, owns several stocks with a market value of $200,000, but they pay dividends of only $4,000 a year, or 2 percent of market value. She decides to transfer these securities to a charitable remainder annuity trust that will pay her $10,000 a year, increasing her gross income by $6,000. Moreover, Mary will receive an income tax deduction equal to about one-half of her $200,000 contribution to the trust.
If Mary had sold the stocks instead, she would pay a large tax on her capital gain. Their cost basis is $40,000, compared to the current market value of $200,000, resulting in a gain of $160,000. At a federal capital gains tax rate of 15 percent, the federal tax would be $24,000, and there could also be state taxes. This would leave her with, at most, $176,000 to reinvest, so she would have to find stocks that pay dividends of at least 5.69 percent to receive the same $10,000 her trust can pay her.
In addition to immediate tax savings, there are other reasons Mary felt the creation of a trust made sense. First, she was relieved of asset management worries. Mary no longer had the day-to-day concerns of investing for needed income. Also, she freed herself of similar concerns in the future, when ill health or other factors may complicate estate management. Second, there were significant estate tax advantages. The charitable gift made through her CRT will not be taxed in Mary’s estate at death.