Separate remainder trust
A charitable remainder trust is a tax-exempt remainder trust governed by a trust agreement. You choose the trustee who is responsible for administering the trust and guiding the investment of its assets.
Irrevocable gift
A charitable remainder trust is an irrevocable arrangement. Once you transfer assets to the remainder trust, you cannot change your mind and get the assets back. This requirement assures that whatever value remains in your trust when it ends will go to support Arcadia.
Payments vary with value of remainder trust
Each year, your remainder trust will distribute a fixed percentage of its current value, as revalued annually. If your trust's value goes up from one year to the next, its payments will increase proportionally. Likewise, if your trust's value goes down, its payments will also go down.
Remaining assets to Arcadia University
When your remainder trust ends, all of its remaining principal will become available to support Arcadia.
You choose the payment percentage
You choose the percentage of your remainder trust’s value that it must pay each year to its income beneficiaries. The payment percentage must be at least 5%. It may be to your advantage to choose a relatively low payment percentage so that your trust’s assets have the best chance to grow. If the value of your trust grows, so will its payments. A payment rate of 5% to 6% is typical. Payments are usually made in annual, semiannual, or quarterly installments.
Payment flexibility
You can include special payment provisions in your remainder trust that make it a good way to give debt-free real estate or other illiquid assets that may take time to sell. In this situation, you can limit your trust's payments to its net income or its trust percentage, whichever is less. This way, your trustee can take the time necessary to sell your assets at a fair price. If your trust's net income is less than its trust percentage during this time, then it will distribute its net income only. This "net income" limitation can last for the entire term of your trust or just until a specific event occurs, such as the sale of your gift asset.
Who can receive payments?
You decide who will get the payments from your remainder trust. Usually, this will be you, or you and your spouse. You can, however, select other people to receive the payments. For example, you may wish to provide income for parents, a sibling, or children.
How long do payments last?
While most remainder trusts last for one or two lives, other terms are possible. A remainder trust can last for more than two lives, for a specific length of time of up to 20 years, or for a combination of lives and years.
Tax benefits
- Earn an immediate income tax charitable deduction.
- Avoid capital gains tax.
- May reduce estate taxes and probate costs.
You will receive an income tax charitable deduction in the year of your gift. If you cannot use the entire deduction in the year of the gift, you may carry forward your unused deduction for up to five additional years. If you give appreciated securities to fund your remainder trust, you will not pay any capital gains tax when you make your gift.
In addition, because a remainder trust is a tax-exempt remainder trust, it will not pay any capital gains tax when it sells these assets. This means that your trustee will be able to reinvest the full value of the assets you donate. By removing the gift assets from your estate, you may also reduce estate taxes if your estate exceeds the then applicable estate tax credit. You may also reduce probate costs when your estate is settled. The amount of these savings will depend on the size of your estate and on estate tax law in force at the time your estate is settled.
Taxation of payments
The taxation of remainder trust payments depends on the remainder trust’s past distributions and investment performance. Payments from a remainder trust are typically taxed as ordinary income. If the trust is funded with appreciated assets, a portion of the payments could be taxed at lower capital gains tax rates in some years. It is even possible for a portion of the payments to be tax-free in years when there is not enough ordinary income and capital gain income to make the payments.
Add funds anytime
You can make additional gifts to your remainder trust anytime. Additions earn an additional income tax charitable deduction that may save you income taxes if you itemize your deductions. You will also increase future payments without the effort and expense of creating a new remainder trust.
Assets to consider giving
The following assets make excellent sources for funding your charitable remainder remainder trust:
- Cash that you currently have in a savings account, bank CD, money-market fund, or other safe but low-yielding investment.
- Securities, especially highly-appreciated securities.
It is also possible to create a remainder trust using real estate that is debt-free or other illiquid assets that may take time to sell.
Jeanie Kowalski is 76 years old and her husband Joshua is 75. Many of the stocks in their portfolio have appreciated substantially in value over the many years the Kowalskis have owned them. They are enthusiastic about making a major gift to support Arcadia University, but they also would welcome a way to receive greater income from their investments without paying a big capital gains tax.
After consulting with their advisor, the Kowalskis find that a 5% charitable remainder trust funded with $500,000 in assets will meet their needs perfectly. They fund their remainder trust with $400,000 in stocks plus $100,000 from a money market fund. They paid a total of $75,000 for the stocks, which currently produce about 2% in dividends each year. Their money market fund has been earning about 2% interest annually.
Benefits
- The Kowalskis will receive $25,000 in payments in the first year of their remainder trust, significantly increasing the income they had been receiving from these assets. If the income and appreciation of the remainder trust's investments, net of costs and fees, total 7% annually, their payments will grow to over $33,647/year* in 16 years.
- The Kowalskis will receive an immediate income tax charitable deduction of about $240,555**.
- The Kowalskis' trustee will be able to sell their stock immediately in order to diversify their remainder trust's investments without paying any capital gains tax.
- Assuming its investments earn a 7% net annual return on the remainder trust's investments, over $686,393* will be left in the Kowalskis' remainder trust to support Arcadia University when their remainder trust terminates.
*The future payment amounts and principal amount remaining for Arcadia University will be lower if the Kowalskis' remainder trust earns less than 7% annually.
**The Kowalskis' income tax charitable deduction will vary slightly depending on the timing of their gift.
