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A-C | D-K | L-Q | R-Z | List
of Terms
529 plans
A 529 plan is a popular financial instrument that allows parents, grandparents, or
anyone interested in saving for higher education to own and control funds that offer
investment choices and are free from federal tax on distribution. Many states have
their own plans, managed by professional investment managers, and you don't have
to live in that state to invest your money there. A few states even offer a state
income tax deduction for contributions to these funds.
annuity trust
An annuity trust is a type of charitable remainder trust that pays the same fixed
dollar amount every year. This yearly amount is determined when the trust is established
and must be at least 5 percent of the initial fair market value of the trust's assets.
bargain sale
A bargain sale is part gift and part sale. A donor can give appreciated property
to the college at a “bargain” price. Because capital gains are apportioned
between the donor and the college, the donor reports a smaller capital gain and
receives a charitable income tax deduction for the net value of the gift.
(Note: under current tax law, each individual has a
$250,000 capital gain exemption on the sale of a primary residence.)
Assumptions:
Fair market value of donor's house $1,000,000
Donor's cost basis 200,000
Capital gain in the property 800,000
Here's what happens:
Donor sells to Smith for bargain price: $750,000
Value of the gift to Smith: 250,000
($1 million value less actual sale price)
Reportable capital gain 350,000
Because 25 percent of the value of the property is a gift to
Smith ($250,000 out of $1 million), 25 percent of the capital gain is forgiven. The gain
is $800,000, so 25 percent of the gain is $200,000. From her total gain of $800,000 the
donor is left with $600,000 of reportable capital gain, of which $250,000 is covered
by her individual exemption.
The final result: the donor has liquidated a $1 million
property with only $350,000 of reportable capital gain. In addition she can claim
a $250,000 charitable tax deduction.
bequest
A donor can name Smith College in her will as the recipient of all or a part of her
estate at death.
beneficiary
The person or persons whom you designate to receive the benefits or proceeds of your
financial instruments. Smith has a beneficiary form that allows you to include Smith
among your beneficiaries.
charitable gift annuity
A gift annuity is a contract between a donor and Smith College that will provide
a guaranteed, fixed income for the life of the donor or other designated beneficiary.
The annuity assets are commingled with Smith's endowment, and the program is backed
by the total assets of the college. There are no management fees or investment worries.
The minimum annuity gift is $10,000.
An annuitant must be sixty years of age at the date
of the agreement. Rates offered are based on the annuitant's age at the time of the
gift. Payments are made quarterly, and a substantial portion of each payment is received
tax free.
Gift annuities generate an immediate charitable income
tax deduction. Capital gains are reduced dramatically and can be reported over a
number of years so that those taxes are not due all at one time.
Annuities based on two lives are also available, but
the rates are generally lower.
Click to view charitable gift annuity rates
charitable lead trust
A charitable lead trust is the opposite of a life income gift arrangement: the donor
places assets in trust, and the trust generates annual income for charity over a
period of years. After a specified length of time, the assets come out of the trust
and become the property of the donor's heirs.
The lead trust is a valuable means of transferring assets
to heirs at reduced gift and inheritance taxes. Although the donor will likely pay
gift taxes (and possibly generation-skipping taxes) upon creating the trust, the
assets in the trust will grow tax-free during its term, which is typically 20 years.
When the heirs receive the assets at the end of the trust term, there will be NO
inheritance taxes applied to that transfer.
The donor can name multiple charitable beneficiaries
to receive payouts from the trust during its term. The donor can also use non-cash
income-producing assets to fund the trust. Commercial real estate is a good example
of a non-cash asset that can be passed to younger family members through a charitable
lead trust.
Charitable lead trusts are complex and require advice
from experienced attorneys. In our experience it is inadvisable for donors to consider
this type of trust for assets totaling less than $1 million.
charitable remainder trust
Charitable remainder trusts are flexible instruments that enable donors to:
Claim a charitable tax deduction in the year the gift
is made
Provide an income stream for themselves or someone else
Remove assets from their taxable estate
Make a significant gift to one or more charities
A donor can place an asset in a trust and designate
a trustee to manage the trust. From that trust, the donor (or a person that the donor
has named) receives a specified sum at set intervals—usually every quarter.
When the donor or beneficiary dies, or after the predetermined number of years, what's
left in the trust (the “remainder”) goes to Smith College and/or other
charitable organizations. The annual payments differ according to the kind of trust.
An annuity trust pays the same fixed dollar amount every
year. This yearly amount is determined when the trust is established and must be
at least 5 percent of the initial fair market value of the trust's assets.
A standard unitrust pays a variable amount each year.
The amount is equal to a predetermined percentage of the fair market value of the
trust that year, at least 5 percent.
A net income unitrust also pays a variable amount each
year. The amount is equal to the net income produced by the trust that year or a
predetermined percentage of total assets, whichever is smaller. (Trust provision
can provide that payments may be increased in some years to make up for earlier years
when net income was lower than the predetermined percentage.)
A “flip” trust is a hybrid of a net income
trust and a standard unitrust. This vehicle is especially useful when funding a trust
with an illiquid asset such as real property or tangible personal property. Until
the asset is sold, the trust only pays the lesser of the net income or the stated
payout rate. Once the illiquid asset is sold, the trust “flips” and begins
to act like a standard unitrust paying the stated payout rate.
Trusts are very well suited for gifts of cash and appreciated
securities, and can also be funded with real estate, privately held stock or other
non-cash assets.
Charitable remainder trusts allow donors flexibility
in that they may choose their own payout rate and their own trustee. The minimum
payout rate allowed by law is 5 percent.
The Smith program offers both unitrust (variable income)
and annuity trust (fixed income) options. Unitrust income is calculated by applying
the payout rate to the value of the trust assets at the beginning of each year, allowing
the beneficiary's income to keep pace with growth in the assets over time. Annuity
trust income is determined at the time the trust is funded by applying the payout
rate to the initial value of the trust.
cost basis
Cost basis is the amount you pay for an asset such as shares of stock or real estate.
This figure is used to determine how much appreciation (capital gain) you have in
an asset. |
