Trusts and Annuities

Charitable Remainder Trusts and Charitable Gift Annuities Offer Benefits for Family Financial Planning!

Many of our friends who have created family foundations are aware that there are financial benefits of giving a gift through a charitable gift annuity or a charitable trust. Most of these two vehicles are designed to provide to the donor and his or her spouse payments for life in exchange for a gift of publicly traded stock. The usual benefits include:

  • Avoiding capital gains taxes on stock that is highly appreciated. A charitable trust or gift annuity pays no tax when it sells the stock.
  • Increasing the donor’s cash flow. Payments from charitable trusts are typically 5% to 7%. The payments in gift annuities are typically much higher for older donors.
  • Receiving an income tax deduction.
  • Diversifying an investment portfolio. Trust assets are commingled with thousands of corporate stocks and bonds in the multi-million-dollar endowment, and gift annuity reserve assets are invested in the same manner.

The “advanced applications” of charitable trusts and gift annuities are less well known, but they can be very significant for a creative donor. For example:

 

  • An owner can give real estate or closely held stock through a charitable remainder trust and increase cash flow significantly while avoiding capital gains taxes.
  • Trusts can be set up for a term of years, and pay out a higher amount than a trust arranged for life – increasing immediate cash flow even further.
  • Trust investments can be managed for high growth during a donor’s working years, and then provide the donor with higher cash flow during retirement. The trust principal compounds tax-free during the “growth phase” of the trust.
  • Gift Annuity payments can be deferred until retirement, and the starting date can be flexible.
  • Gift Annuities payments can be scheduled to coincide with tuition payment years (from 2 to 10 years in duration) to fund all or a portion of a complete college education.
  • Gift Annuities purchased with cash usually result in about half of the payments being tax-free during the life-expectancy of the donor-annuitant(s). This is in addition to receiving a large tax-deduction up front.

The “advanced applications” of charitable trusts and annuities can be very significant for a creative donor.

Gifts of Private Company Stock

One of our donors, we’ll call him Mr. Smith, made a gift of shares in his private company, Acme Dynamics, Inc., back in 1994. The company purchased the shares from his trust and TCN reinvested the proceeds in a highly diversified portfolio. He now receives 7% of the trust’s value each year.

“It’s the best investment I’ve ever made, a vital part of my retirement plan,” said Mr. Smith. “I had a number of scholarships to finance my education, and that is what I plan to do through my foundation at TCN with the remainder interest of my trust. I feel that I’d like to repay in some small way what I have been given. The trust allows me to do that.”

Providing for Children

One donor, Mrs. Eleanor B., funded gift annuities for her two grandchildren for their college education, which will be 13 and 15 years from now. She has scheduled the payments to be paid over a 5 year duration for each of them, anticipating that the grandchildren will attend four years of under-graduate school, and perhaps one year of graduate school. She said “this is the first gift I’ve made that gives me a tax deduction, moves money out of my estate, and assures that the grandchildren will have an adequate college education”.

A Term of Years Trust

Another donor, James O., with a very active foundation, contributed $1 million to a term of years trust that will pay to him and his wife 7% of the trust’s value each year.

The tax deduction is higher for a 15 year term trust than for a lifetime trust, and his family foundation will have the use of the money more quickly, during his and his wife’s lifetime, to fund the charitable project they have planned for their retirement years. “The advantages as we see it are these. First, we have a higher income now, before retirement, than appreciated securities would provide. Second, our TCN foundation gets the money in 15 years, while we’re still alive to enjoy seeing the benefits we can provide through the project we have in mind during retirement”.

Gift Annuities for Retirement

Mr. and Mrs. Peter D., long-time donor-advisors of their foundation at TCN, contributed to two charitable gift annuities over the past two years. They used highly appreciated stock, which they felt comprised to much of their portfolio, and may not always hold its current high value. These gift annuities are intended for their retirement in about 12 years, and so payments will be deferred for that period of time, when they will provide much higher payments than if they started the payments immediately.

“I thought I could accomplish a number of purposes at the same time,” says Mr. D. concerning the gift annuities. “I could help fund our foundation for our children to carry on, which is very important to me and my wife, and we could reduce our risk exposure to the one major stock holding in our portfolio. And we can diversify our income sources, knowing exactly what we will be paid per year when we retire. The gift annuities are a convenient medium if you have appreciated assets. Plus, they’re not ‘one size fits all’. Within limits, you have flexibility as to the timing of the start of the payments. And there is no set-up fee to start a gift annuity, so we will probably continue to purchase more gift annuities as our stock grows in value.”

Gifts of Real Estate

In early 1998 Mr. Sam L. funded a charitable remainder unitrust with $2 million of commercial real estate. TCN sold the property and it was invested in the TCN diversified investment funds, and is now paying his wife June 6.5% of the trusts value each year. The fund is currently valued at $2.2 million.

“Having had our foundation for several years, I know that there were other assets to give,” Sam says. “Whenever we have appreciated assets we are considering selling, I make a calculation between the proceeds after the capital gains tax versus tax savings from a charitable deduction.” To determine capital gains on his property, Sam estimated that his cost basis, including capital improvements, was a little less than $300,000. This gift turned Sam’s and his wife’s real estate into an income-producing asset that requires a lot less of their time, while avoiding capital gains taxes on the sale and reinvestment. “The trust is in my wife June’s name, and I think it gives her a certain comfort level knowing this will be producing income for her for the rest of her life,” Sam adds.

Last Minute Estate Planning

Mrs. Katherine J. realized that she would likely always have an estate that would exceed the federal estate tax credit exemption by at least $300,000 or more during the balance of her lifetime. She also realized that this could cost her family $120,000 or more in death taxes. So she decided to set up a gift annuity using $300,000 of appreciated stock that was only paying her 2% per year, or $6,000 in annual income. At her age, the gift annuity pays her 8%, thereby increasing her cash flow to $24,000 per year - - four times as much as before. In addition, she received a tax deduction of about $100,000, which she can use against current income, and carry forward some of the deductions for up to five more years.

Katherine says, “I never thought that I could save so much in taxes, and increase my income by so much, and do so much good at the same time. Most of the money that I would have paid in taxes is now going to go into my family foundation when I die, and my children will see to it that good things are done with that money. I can’t think of anything better that I could have done with that stock, and the market was beginning to be worrisome for me at my age, anyway!”

Please call the TCN Planned Giving Office at 800-822-6711 for other gift information.