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
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.
How It Works
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.
What It Pays
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 five 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 five percent.
Net Income Trust
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 standard unitrust and a net income trust. 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.
Jane '55 and her husband John want to save for their three-year-old granddaughter's college education, but they also want to make a significant gift to Smith in honor of Jane's 50th reunion. A charitable remainder trust can help them do that. In the process they will reduce their taxable estate, which will benefit all of their heirs.
Blue chip stocks inherited from Jane's father 25 years ago, in which there is a large capital gain, are a good asset to turn into a charitable remainder trust for their granddaughter's benefit.
Here's how the Term-of-Years Charitable Remainder Trust works:
- Jane donates $150,000 of appreciated stock to trust
- Jane claims a charitable tax deduction of approximately $50,000
- Trustee sells the stock in the trust with no capital gains tax ramifications for Jane*
- Trustee invests for growth of principal during first 15 years. Assuming 8 percent growth rate over that period and a 6 percent payout during the last four years, the granddaughter will receive approximately $28,000 each year, between ages 18 and 21
- At end of trust term (when granddaughter turns 21), the remaining principal will pass to Smith to create an endowed scholarship fund
*Note: A trust that pays income to a grandchild will involve gift and/or generation-skipping tax considerations when the trust is funded.