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Charitable Remainder Annuity Trusts
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You’re considering a lifetime gift in partnership with the Associate Alumnae of Douglass College > Your planning objective is increased income > Your preference is fixed income payments > You want to retain some flexibility in the management of your gift |
The charitable remainder annuity trust is an individually managed trust that combines regular, predictable income with some flexibility in management and investment.
- The annuity trust pays its beneficiaries – you, your spouse, family members, or other individuals – fixed-dollar income or a fixed percentage of the initial value of the assets that funded the trust.
- Income from your annuity trust can be paid to you and your other beneficiaries for lifetime or for a term of up to 20 years.
- No upfront capital gains tax is payable if you fund your annuity trust with appreciated property. So, you can contribute appreciated but low-yielding assets and put the entire value of your gift to work generating higher income for you.
- Besides avoiding capital gains tax, you also receive a charitable income tax deduction when you create an annuity trust. Your deduction will be based on the full fair market value of the assets you contributed, reduced by the present value of the income interest you retained.
- The charitable income tax deduction for an annuity trust is usually higher than that for a unitrust, because the unitrust is likely to pay out more income to the beneficiaries over time. The Associate Alumnae of Douglass College Office of Gift Planning can provide deduction comparisons for you and your advisors.
- When your annuity trust terminates – at the death of the last beneficiary or at the end of the trust term – the remaining balance will be available for the use you designated when you created the trust.
- Annuity trusts cannot be flexible in their payout as unitrusts are. Therefore they cannot accept gifts of illiquid assets, invest solely for growth, or pay out net income only.
- You, an advisor, or a financial institution can serve as trustee of your annuity trust.
Planning Tip – Capture the Benefits of High-Yield Tax-Free Bonds
Are you concerned about declining yields in your portfolio of tax-free bonds? You can capture high interest rates and still make a gift to the Associate Alumnae of Douglass College by placing one or more of your older bonds into an annuity trust. The trust will hold the bonds, and pass their tax-free income through to you and your beneficiaries. In addition, you will receive a charitable income tax deduction based on the market value of the bonds you donated, minus the present value of the income interest you retained.
The effect is to make one asset perform two tasks for you – pay you high tax-free income and also generate a charitable deduction. Meanwhile, your gift has increased Douglass' long-term financial strength.
The Associate Alumnae of Douglass College Office of Gift Planning can give you and your advisors more information on this annuity trust planning option.
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Example Your portfolio contains fixed-income securities and many tax-free bonds. As your gift to the Associate Alumnae of Douglass College, you decide to place $250,000 of your tax-free bonds into an annuity trust paying income to you and your husband. What are your benefits? |
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Donors |
Wife and Husband, 68 and 70 |
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[1] If the bonds mature or are called, the annuity trust may incur capital gains tax, which will be reflected in your income payments. |
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Asset contributes |
Tax-free bonds |
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Amount contributed |
Fair market value $250,000 |
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Cost basis |
$125,000 |
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Income rate |
5% |
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Annual income |
$12,500 (tax-free)[1] |
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Charitable deduction |
$84,718 |
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Tax savings |
@ 35% rate: $29,651 |
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Note 1: This calculation is based on a factor that changes monthly. For the most current figures, contact us or go the Gift Calculator to see the benefits this gift would provide you today. |
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Note 2: The annuity trust is not the only gift plan that pays you lifetime income. See below to compare its benefits with those of the charitable gift annuity and the unitrust. |
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How Do You Create an Annuity Trust?
Consult with an attorney specializing in charitable trusts and estate planning. To save you time and expense, we can provide an initial draft of the annuity trust agreement for review by you and your attorney. Once your trust agreement is signed, you can fund your annuity trust by transferring assets to your trustee.
Email us, complete the personal illustration form, or call us at 732-246-1600 so that we can assist you through the process.
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Which Gift Plan Works Best for You? |
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Like the annuity trust, the gift annuity pays you fixed income. Because it is a simple obligation and not an individually managed trust, you can often receive higher payments from a gift annuity than you can from an annuity trust. In addition, a gift annuity’s payments come to you partially tax-free, and partially as capital-gains income if you contributed appreciated assets. Unless your annuity trust is invested in tax-free securities, all income will be taxed to you at ordinary income rates. The annuity trust offers management flexibility, multiple beneficiaries and existence for a term of years rather than the beneficiaries’ lifetime. The unitrust is even more flexible. In addition, its payout structure allows for income growth over time. We can show you how a unitrust paying 5 percent income will eventually outperform an annuity trust paying 6 or 7 percent. The following chart compares the income and tax benefits from these three gifts: Donors: Wife and Husband, 68 and 70 Asset contributed: $100,000, cash |
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Charitable Gift Annuity |
Annuity Trust |
Unitrust |
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Income rate |
6.5% |
5% |
5% |
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Annual income |
$6,500 (fixed) |
$5,000 (fixed) |
$5,000 (variable) |
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Tax-free |
$4,017 |
-0- |
-0- |
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Ordinary income |
$2,483 |
$5,000 |
$5,000 |
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Charitable deduction |
$14,054 |
$33,877 |
$40,531 |
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