Charitable Remainder Gifts
Aside from a direct gift from a living trust or a will, or the designation of the Community Foundation as the beneficiary of a life insurance policy, the most common types of planned gifts are Charitable Remainder Gifts. We strongly recommend the use of professional counsel in structuring, drafting, and reviewing all the tax implications for such charitable giving plans. Below are the types of Charitable Remainder gifts that the Community Foundation currently administers.
Charitable Remainder Trusts
The basic purpose of a charitable remainder trust is actually fairly simple: to pay the donor, or (after the donor's death) the donor's spouse (or another individual) income for life (or a term of years) and to then distribute the trust principal to charity when the last income beneficiary has passed away (or the term of years expires). With certain types of trusts (unitrusts), the donor can change the list of charities (or "remaindermen") at any time during the life of the trust. By using low-yield, appreciated securities to set up a charitable remainder trust, the trust can sell those assets without incurring any capital gains liability, and it can then purchase new, higher-yield stocks. That way, donors can actually increase their current income, and make a major gift to charity with assets that would otherwise have been taxed heavily if they were sold and the proceeds of sale given directly to charity.
There are two basic types of charitable remainder trusts: a unitrust and an annuity trust. The unitrust pays out a specified percentage of the trust's value, calculated annually. This amount must be at least 5% of the annual net fair market value of the trust assets. Donors can make additional contributions to a unitrust during their lifetimes or through their wills. If the trust's assets increase in value, the annual payments increase. The annuity trust pays out a fixed amount each year, and that amount must be at least 5% of the initial value of the property or assets of the trust. Subsequent additional contributions to annuity trusts are not allowed.
A charitable remainder trust pays no income tax on accumulated income or capital gains. Donors can receive an immediate Federal and State income tax deduction (and spread it out over 5 years if needed) by creating a charitable remainder trust. The amount of the deduction is determined by Treasury Department tables that consider several factors, including the type of trust (unitrust or annuity trust), the percentage or amount to be paid out each year, and the number and age of the income beneficiaries.
A variation of the standard unitrust is the net income unitrust or the income only unitrust. This type of trust pays the beneficiary either the net yearly income or a fixed percentage, whichever is less. It can also have a "catch-up" clause, which permits the trust (in any subsequent years when the income exceeds the fixed percentage) to make up for any deficiencies that may have occurred in prior years.
Q-Tip Charitable Remainder Trusts
The term "Q-Tip" stands for "Qualified Terminable Interest Property". In a trust of this type, the donor's spouse must be given the right to all of the income from the property in the trust for his or her lifetime. Then the property can pass to the Community Foundation. One of the advantages of a Q-Tip trust with a charitable remainder is that the trust can give its trustees the power to invade the trust principal in case the spouse has unexpected medical expenses or other needs.
Charitable Remainder Interest in a Residence or Farm
A full or partial interest in a home or farm can be given to the Community Foundation, and the donor can retain the right to live in the home or operate the farm for the rest of his or her life. The gift will create an income tax charitable deduction for the present value of the Foundation's estimated remainder interest, and the donor will avoid any potential capital gains tax on the home or farm's built-in appreciation. The charitable deduction thus frees up tax dollars, creating spendable income without any disruption in the donor's lifestyle. When the Foundation receives the property, it can be sold to establish a named fund in the General Endowment, a new Donor Advised Fund, a new Field of Interest Fund, or a new Restricted Purpose Fund.
Charitable Lead Trusts
A full or partial interest in a home or farm can be given to the Community Foundation, and the donor can retain the right to live in the home or operate the farm for the rest of his or her life. The gift will create an income tax charitable deduction for the present value of the Foundation's estimated remainder interest, and the donor will avoid any potential capital gains tax on the home or farm's built-in appreciation. The charitable deduction thus frees up tax dollars, creating spendable income without any disruption in the donor's lifestyle. When the Foundation receives the property, it can be sold to establish a named fund in the General Endowment, a new Donor Advised Fund, a new Field of Interest Fund, or a new Restricted Purpose Fund.
Information about our investment and payout policies and our fee structure can be found in the Advisor Toolkit.
For more information contact President/CEO, Dan Baldwin, or call 831.375.9712 x 115.
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