Glossary of Terms
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.
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 five percent of the initial fair market value of the trust's assets.
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.)
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.
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.
A donor can name Smith College in her will as the recipient of all or a part of her estate at death.
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.
Chartiable 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.
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 and make a significant gift to one or more charities.
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.
Deferred payment gift annuity
A deferred payment gift annuity (DPGA) provides a guaranteed, fixed income for the life of the donor or another designated beneficiary beginning at age 60 or older. It is similar to a charitable gift annuity except the beneficiary's income payments are deferred to a later date. That provides a higher charitable tax deduction when the gift is made and locks in a higher payout rate. For example, a 50-year old donor agrees to make a gift now, but defers receiving payments until she/he reaches age 65 when it will serve as supplemental retirement income. The deferral of payments locks in a higher fixed rate.
The gift assets are commingled with Smith's endowment and are backed by the total assets of the college. There are no management fees or investment worries for donors. The minimum gift amount is $10,000. Annuitants must be at least age 60 when payments begin.
Annuity payments are determined by three things:
- Age of the beneficiary at the time of the agreement
- Age of the beneficiary when payments begin
- Length of deferral—the longer the deferral, the higher the rate
Deferred payment annuities based on two lives are also available, but the rates are generally lower.
A substantial portion of each payment is tax-free. Even though the beneficiary does not start receiving payments until a pre-selected future date, a portion of the gift is immediately deductible for federal income tax purposes on an itemized return. Capital gains are reduced and can be reported over a number of years (if the donor is also the income beneficiary).
Estate tax is levied on transfers of wealth that happen at death. Currently an individual can leave an unlimited amount to others before triggering an estate tax.
Flexible gift annuity
A flexible gift annuity is structured so that the annuitant has control over the date at which payments begin. This may be a good gift vehicle for those who are unsure of their retirement date.
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.
A gift annuity is a contract whereby the donor makes a gift to the college and, in turn, Smith promises the donor or another specified beneficiary, a fixed dollar payment every year for life. The yearly payment is based on the amount of the gift and the age of the income beneficiary at the time of the gift. Gift annuities may be for one or two lives but both beneficiaries need to be at least 60 years of age.
Gift tax is levied on gifts to non-charitable beneficiaries.
Health care proxy
You can assign someone you trust the authority to make important medical decisions on your behalf if you should become unable to do so yourself.
In the commercial investment market, a "bond ladder" refers to investments in securities with staggered maturity dates. Such a plan lessens the investor's overall risk by producing an average rate of return over the period of time covered by the "ladder."
A similar effect can be arranged with a series of charitable gift annuities (or deferred payment annuities), each with a different payout start date. The overall effect is to lock in a stream of income that starts small and grows larger as additional annuities join in. This is particularly useful in retirement planning.
A living trust is a document with which you direct the transfer of your assets at your death. A living trust helps assets pass outside of the probate process, can continue after your death and is revocable at any time.
An asset held long term is any asset that you have held longer than one year.
Pooled Income Funds
The gift is pooled with other contributions in a professionally managed fund. The donor or other beneficiary receives a proportionate share of the fund's annual income for life. The income varies depending on how much the fund earns and the number of shares the donor holds in the pool.
Power of attorney
You can name someone—not necessarily an attorney—to make financial and other important decisions for you in case you become mentally or physically incapacitated. Unless this document exists, the court can appoint someone to make these decisions for you.
Probate is a judicial process where ownership and distribution of assets are reviewed. Ways to avoid probate include assignment of life insurance, placing assets in a revocable trust, establishing joint tenancy with rights of survivorship and designating beneficiaries on retirement accounts. Probate can be costly and time consuming and the court's proceedings are, by law, a matter of public record.
Smith College's charitable gift annuity rates are based on the recommendations of the American Council on Gift Annuities, a national nonprofit organization that uses detailed actuarial research into life expectancies to publish suggested annuity rates for charities. Smith's chief financial officer adapts the ACGA recommendations to best suit the needs of the college and its donors.
Retained life estate
A donor can give a personal residence, such as a home or condominium, to charity and retain use of the property for the remainder of her or his life. The donor continues to live in the property yet takes a charitable income-tax deduction for the "remainder" interest given to charity. The donor continues to be responsible for taxes, insurance and maintenance on the property until his or her death. If the donor chooses to move out of the property, the gift is accelerated and the donor can claim an additional charitable tax deduction.
A "step up" in [cost] basis means that you have no capital gain in inherited assets if you choose to sell them immediately.
Tangible personal property
The IRS defines tangible personal property as "any property, other than land or buildings, that can be seen or touched. It includes furniture, books, jewelry, paintings, and cars."
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 five 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.)