Charitable Remainder Trusts
Charitable remainder trusts are gift arrangements that enable you to contribute to the TAPPI Foundation while providing an income for yourself and/or another beneficiary for life or a term of years. This individually managed trust can be tailored to suit your objectives. You may build a retirement account, generate a higher income from assets you currently own, or provide for your spouse, family members, or other beneficiaries. The charitable remainder trust offers a number of attractive benefits:
- Annual income for yourself and/or other beneficiaries
- Immediate federal income tax charitable deduction
- Elimination of capital gain taxes on the transfer of appreciated property
- Professional management and investment diversification through the TAPPI Foundation at no cost
- Estate tax savings
- Ability to designate the future use of the gift proceeds at the TAPPI Foundation
A TAPPI Foundation managed remainder trust can be established with an irrevocable gift valued at $100,000 or more. A variety of assets can be donated to a trust-cash, publicly traded stocks and bonds, closely held stock, real estate and, in some instances, tangible personal property such as works of art.
There are two basic kinds of charitable remainder trusts - the charitable remainder unitrust and the charitable remainder annuity trust.
Charitable Remainder Unitrust
The unitrust pays the income beneficiary(ies) a variable income, based on a fixed percentage of the trust assets as revalued once each year. Typically, the fixed percentage is between 5-7%. One of the advantages of the unitrust is that your income from the trust can increase as the trust principal grows over time. You may make additional contributions to a unitrust at any time.
Example:
A charitable remainder unitrust is established with appreciated stock valued at $100,000. The stock had been bought for $10,000 several years before. The annual payout rate is 5%; payments are to be made to the 65-year-old donor for life. It is assumed that the trust earns a 9% total return on average.
Original Trust Principal $ 100,000
Immediate Income Tax Deduction $ 48,900
Income Tax Savings (31% rate) $ 15,100
Capital Gain Tax Savings (28% rate) $ 25,200
First Year Payout to Beneficiary $ 5,000
Anticipated Payout to Beneficiary
After Five Years $ 6,000
Charitable Remainder Annuity Trust
The annuity trust pays the income beneficiary(ies) a fixed annual income determined at the outset. The annuity trust may be advantageous if you are more interested in the security of a constant return than in the long-term growth potential of the unitrust.
It is possible to structure an annuity trust to pay the income beneficiary(ies) tax-exempt income. Such a trust can be funded with cash or with tax-exempt bonds. Additions may not be made to an annuity trust; however, multiple trusts can be set up.
Example:
A charitable remainder annuity trust is established with appreciated stock valued at $100,000. The stock had been bought for $25,000 several years before. The fixed annual payout is 6% of the value of the initial trust assets, or $6,000. Payments are to be made to the 75-year-old donor for life.
Original Trust Principal $ 100,000
Immediate Income Tax Deduction $ 62,200
Income Tax Savings (31% rate) $ 19,200
Capital Gain Tax Savings (28% rate) $ 21,000
Fixed Annual Payment to Beneficiary $ 6,000
Charitable QTIP Trust
A QTIP trust is another type of irrevocable trust through which you can make a significant gift to the TAPPI Foundation, provide a lifetime income to your spouse, and avoid federal estate and gift taxes on the trust principal. A key advantage of the QTIP trust is that your spouse can have access to the trust principal as well as the income, should unexpected family needs arise. The TAPPI Foundation does not serve as trustee of QTIP trusts.
Charitable Lead Trusts
The charitable lead trust allows you to make a future transfer of assets to your heirs at a reduced gift and estate tax cost, while continuing to support the TAPPI Foundation during your lifetime. During a specified number of years, an annuity or a fixed percentage of the trust assets is paid to the TAPPI Foundation. At the end of the trust term, the assets are passed to the beneficiaries you name.
The short and long-term benefits for your estate can be significant. First, you can receive a charitable gift tax deduction for the present value of the annual trust payments to the TAPPI Foundation. This deduction can be used to reduce your gift and estate tax liability on substantial transfers to children or grandchildren.*
Although you will not have any income tax deduction, a second advantage is that the income earned by the trust is excluded from your gross income and is, therefore, not taxable to you. In effect, this produces a reduction of your taxes over the trust term.
A third attractive aspect of the lead trust is that any appreciation in the assets during the term of the trust is not subject to additional gift or estate taxation. As a result, you may be able to pass on to your heirs a larger estate after taxes than would otherwise be possible.
The assets of the trust can be invested and managed by the TAPPI Foundation (at no charge) or by another trustee of your choice.
A charitable lead trust can be established with publicly traded securities, closely held stock, income-producing real estate, partnership interests or a combination of the above. A lead trust can be established during your lifetime, as a testamentary trust under your will, or through a pour over from your estate to a "dry" trust established during your lifetime. (Typically, a lead trust is appropriate for high net worth individuals who wish to fund the trust with assets valued at $500,000 or more.)
Example: A charitable lead trust is established with property valued at $500,000 for a 20-year term, assuming a 5% payout to the TAPPI Foundation and a 9% total return earned by the trust.
Gift Tax Deduction $ 306,600
Gift Tax Due** $ 0
Benefit to Heirs $ 998,800
Benefit to the TAPPI Foundation $ 744,400
Grantor Lead Trust
At the end of the term of a grantor lead trust, the trust assets revert back to you, rather than being passed on to your heirs. Under the grantor lead trust, you receive an income tax deduction for the present value of the annual trust payments to the TAPPI Foundation. The grantor lead trust may be appropriate if you wish to accelerate future deductions into the current year.