Giving to the College
Ways to Give
Charitable Remainder Annuity Trust
A charitable remainder annuity trust requires a fixed income payment (minimum of 5%) to the donor or other income beneficiary(ies) based on the initial fair market value of the gift.
IRS tables must be used to calculate the value of the remainder interest (charitable deduction) of an annuity trust. Additionally, an annuity trust must pass the 5% probability test. This test establishes that there is no more than a 5% probability that the trust principal will be exhausted prior to receipt by the charity. Both of these calculations take into account the age(s) of the income beneficiary(ies) and the payout percentage.
Unencumbered long-term capital gain property can be used to fund a charitable remainder annuity trust. The source of income is shifted from low and variable earnings to a higher, stable return, typically at about the yield on long-term government bonds, in which the trust may be invested after sale of the original asset. There is no capital gains tax payable when a charitable trust sells appreciated property. The income tax charitable deduction is usable for as many as six years if needed to be used entirely. The resulting cumulative tax savings reduce the net cost of the plan, which improves the effective rate of return.
As an illustration, a 75 year-old widow owns a large block of stock in the company for which her husband was an executive. It pays dividends at 3% of its market value. Her stock, now worth $200,000, has a cost basis of $80,000.
To improve her income, the stock is used as the initial funding asset of a one-life, 8%, charitable remainder annuity trust. She may claim the deduction up to 30% of her adjusted gross income in the year of the gift and in the following five years, or until the deduction is used up if before five years.
Her pretax income from the asset value jumps from $6,000 to $16,000, up 167% and her net investment is reduced.
| Value of Gift Property | $200,000 | |
| Charitable Deduction | $101,426 | |
| Marginal Income Tax Rate | x .28 | |
| $28,399 | (28,399) | |
| Fair Market Value of Stock | $200,000 | |
| Less Cost Basis | (80,000) | |
| Long-term Gain if Sold | $120,000 | |
| Capital Gains Tax Rate | x .28 | |
| Capital Gains Tax Avoided | $33,600 | (33,600) |
| Net Cost of Gift Plan | $138,001 |
The lifetime annuity of $16,000 represents an effective rate of return of 11.59% on her net cost.
Any examples given are meant to be illustrations of the benefits of charitable vehicles available to you. This should not be construed as legal or tax accounting advice. Always consult an attorney for specific arrangements. The College can assist you in this regard.
For further information on charitable remainder annuity trusts, fill out the Request for Information Form or contact Bill Heaton, Vice President of Advancement at wheaton@scco.edu or at 714.449.7464.