If your goal is to receive a fixed or variable income for life (or a number of years), avoid capital gain income on appreciated securities or real estate and make a significant gift to Teachers College, then a Charitable Remainder Trust is an option.
How it works
A Charitable Remainder Trust is structured to provide payments to you or another person over your lifetime or for a fixed number of years—usually 20 years. This vehicle enables you to make a significant gift to TC while realizing income from the trust for you and/or someone you designate, reduce taxes and provide a solution for highly appreciated securities or property.
Charitable Remainder Trusts are a good vehicle if you have significant, highly appreciated securities which generate a low income, an investment property or second home you wish to sell or windfall income. The trust is created and the assets are irrevocably transferred into the trust (real estate is deeded to the trust). At this point, the assets are sold and all the proceeds go to fund the trust at full market value—no capital gains liability is incurred.
A Charitable Remainder Trust requires legal counsel to create it and an administrator to manage the investments. TC does not serve as trustee of remainder trusts. Because of these additional costs, TC recommends Charitable Remainder Annuity Trusts (CRAT) and Charitable Remainder Unitrusts (CRUT) start at $100,000. Upon the death of the last beneficiary, the remaining funds go to TC to be used according to your wishes.
There are two types of Charitable Remainder Trusts—each will pay a minimum of 5% annually:
Annuity - pays on a fixed amount of the trust
Unitrust - pays on an annual valuation of the assets
Income and Benefits for You
Payment to you can be monthly, quarterly, semi-annual or annual.
Annual income is not considered tax-free but you receive a charitable tax deduction equal to the gift's remainder value to TC. In addition, if you use appreciated stock, this vehicle helps you eliminate capital gains liability as the gift is based on current market value of shares donated.
In addition, if you are the sole beneficiary, a Charitable Remainder Trust is not subject to federal estate tax. This also holds true if your spouse is the sole surviving beneficiary.
You may want to consider a variation on the Remainder Trust—a Testamentary Charitable Trust. This vehicle is established upon a donor's death and is enacted through a will stipulation. The trust can be created with a specific amount, a percentage of the residue or with a particular asset. This option can be used if you wish to have your spouse benefit from income while still making a significant gift to Teachers College.
Upon the death of the last beneficiary, the remaining funds go to the TC endowment to be used according to your wishes.
If your goal is to pass on appreciated equities to your children/heirs at a reduced cost basis and make an immediate, significant gift to Teachers College, a Charitable Lead trust is an option.
How it works
A Charitable Lead Trust works in reverse of a Charitable Remainder Trust. In the Lead Trust, Teachers College would see fixed income for a term of years, but when the trust ends, the asset principal goes back to you or to your children (or heirs) with the gift tax or estate tax greatly reduced or in some instances, eliminated. In addition, it provides a term, guaranteed annual income to Teachers College now.
This is a perfect vehicle to transfer significant assets to your children or to your grandchildren because the income generated during the trust term may not be included in your reported taxable income and asset appreciation may be excluded from your estate.
You transfer assets to the created trust which is taxable, subject to tax on ordinary or realized capital gains income. The amount of the income generated and donated to TC can either be a fixed dollar amount or a certain percentage of the trust based on an annual valuation. This annual income goes directly to Teachers College for the term of the trust which can be 5, 10 or 20 years. At the end of the trust, the assets go to your children or other heirs based on the date of death value—the appreciation gained during the trust term.
There are two types of Charitable Lead Trusts:
Grantor - the appreciated assets will revert back to the original owner upon the termination of the trust. This does not incur gift tax, but you are then subject to a tax on the assets.
Non-grantor - the appreciated assets will go to an individual(s) upon termination of the trust. The original transfer to the trust does not receive an income tax deduction and may incur a gift tax. While this gift tax may seem a large upfront liability, it is based on the value of the assets when the trust is created, not on the value in 5, 10 or 20 years when it is transferred to your children. Because of the complex nature of a Lead Trust, it is recommended that this vehicle be used for assets of $500,000 or more.
Income and Benefits for You
At the outset, you are required to get a valuation from the IRS on the present value of the assets. While you receive no charitable deduction for the original investment, the income is not part of your personal taxable income and the contributions to TC are deductible from the trust's taxable income. This can be especially beneficial to you if you historically exceed the charitable deduction limit on your personal income taxes.