Charitable Remainder Trusts
Charitable remainder trusts provide a good degree of flexibility that is valuable in charitable gift planning. For example, a variation on remainder trusts can be an effective way to make gifts of real estate.
Types of charitable remainder trusts
There are two different types of charitable remainder trusts: a charitable remainder unitrust and a charitable remainder annunity trust.
A charitable remainder unitrust is a popular way to achieve tax benefits, as well as, a fixed annual percentage on the value of the assets in the trust. The assets are revalued annually and, if the trust value changes, the payment to the beneficiary(ies) changes.
A charitable remainder annuity trust is set up to pay a fixed rate of return based on the initial valuation at the time the property is placed in the trust. The trust assets are never revalued.
For further information about charitable remainder trusts, additional information is also available.
Charitable Remainder Trust Example:
Susan and Fred know what hard work is all about and they have the rewards as a result.
Susan: “I was one of the lucky ones. It was a very tough time for me and my mother, but they were there when we needed a little help. Did it make a difference? Only in every aspect of my life! ”
Fred: “We know how important the work of a ministry is to a community, and we know how difficult it is for them to develop the funding they need. Facilities, up-to-date equipment, getting staff – it’s all literally urgent. We know that the local ministries need our help.”
Susan: “We benefited because they had been supported by others before us – but now we can give back. And what a joy it is to know that when we no longer need it, part of it is going to someone who does. It’s awesome – we are changing lives!”
Fred: “That’s why Susan and I made the decision. The trust will provide income to them and we can see it benefiting His work – giving hope and support to the homeless and needy. But we have the peace of mind knowing that our estate will be there to help our immediate family after we’re gone.”
Susan and Fred are happy that they have made a difference; a difference that will have a profound impact on the lives of others as their funds are used to minister to women and children at Gospel Rescue Mission's Women and Children’s Center and to men restarting their lives at Gospel Rescue Mission's Men’s Center.
Charitable Remainder Unitrust Example:
Mary and John Smith, both 70 years old, have a condominium they purchased a number of years ago. Initially they used it as a vacation home, but as they have gotten older and their children moved away from home and from the area, it gradually became an investment property. It is now fully depreciated and provides a return of about four percent after expenses.
Decisions – Selling Vs Donating
At 70 years old they wish to avoid working with tenants and repairs to the condo. The Smiths have considered selling, but they have been slowed down by circumstances:
After meeting with a development officer, the Smiths sat with an attorney who suggested a Charitable Remainder Trust. In their tax bracket, they could place the property in a charitable remainder trust that would sell the property and invest the proceeds in other investments without having to pay capital gain tax. The Smiths would receive an income for life based on a percentage of the assets in the trust. The trust would be revalued every year, and if the assets increase, their income would rise as well. After their lives, the remainder in the trust would go to the nonprofit organization of their choice.
The attorney ran some numbers and suggested that the Smiths take a five percent payout from the trust ($50,000 the first year as opposed to the $40,000 they are currently earning). The attorney estimated that the trust could earn seven percent and would continue to pay the Smiths five percent each year of the value of the assets in the trust.
First Year Income: $50,000
Total Estim. Income: $1,214,870
Tax Savings: $148,102
At their deaths, the remainder in the trust would pass without taxes or probate to the ministry. Based these calculations, the ministry would receive $1,485,950 in about 20 years. It would increase from the initial $1,000,000 because it was earning more than it was paying to the Smiths. Furthermore, the Smiths would be able to take a current year charitable tax deduction (depending on their taxable income) of $423,150 with a tax saving in their 35% tax bracket of $148,102 (not including any state tax savings) and they would defer $120,000 in capital gains tax over a number of years.
In addition, they could look forward (based on these calculations and current rates) to a total income of $1,214,870 over their estimated lifetime.
Knowing that the trust would mean a wonderful thing for the ministry organization and that they would have higher income and fewer worries without the property itself, the Smiths decided to follow the attorney’s suggestion.
Charitable Lead Trust
Charitable Lead Trust Example:
Phil and Alicia had a successful business developing both residential and commercial real estate. They realized that their assets provided more income than they need for their family’s current living expenses; however they wanted to maintain their assets to ensure their grandchildren would have resources for college educations.
One of their first charitable gifts had been a gift of appreciated stock. They discussed their circumstances with their financial advisor who showed them how they could make a charitable gift now and be able to enjoy seeing the results while they were still here.
Phil: “It really has been a wonderful experience. When we first started developing residential housing, we had no idea where it would all lead. We were fortunate to make some choices that really set up the company for success. It’s grown beyond our wildest dreams.”
Alicia: “We have been able to provide a wonderful home for our children, but they are off on their own now with their own families. While the company has grown, our immediate needs have shrunk.”
Phil: “Not too long ago, we sat down with our kids and our advisors and talked about what was important to us and what we really wanted. Our kids are all doing fine on their own. We certainly don’t need more. Our attorney told us about something called a charitable lead trust funded with some of our excess assets.”
Alicia: “It sounded great to us – some tax benefits and our estate remains intact for our grandchildren’s’ education. Through this trust, we are helping to make a difference in other people’s lives and we’re able to do it while we’re here and can be part of it. It really feels good to see firsthand how the income from the trust can really make a difference.”
Phil and Alicia wanted to contribute $250,000. They placed a sufficient amount of income producing commercial property into a charitable lead trust that would make annual payments of $25,000 over ten years. After ten years, the assets will pass to the their heirs. Plus, any appreciation of the assets that takes place during the term of the trust is not subject to additional gift or estate tax because the gift tax deduction and the amount subject to gift tax is determined at the time their assets are contributed to the charitable lead trust.
Often our financial partners are surprised by just how wonderful the giving experience really is. If you're ready to get started or if you need more information, please click one of the links below :
These are educational illustrations and do not represent legal or tax advice. The value and cost numbers have purposely been selected as round numbers to allow for personal interpretation. The value used is not a minimum, maximum or suggested amount. Please consult your legal and tax advisors about your specific situation.