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Charitable Trusts - gifts that provide income
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A donor may choose to make an irrevocable gift to the Mercy and Unity Hospitals Foundation while continuing to receive or creating an income from the gift. This can provide the donor with a supplemental retirement fund, an enhanced source of income or simply a means to make a more significant gift while retaining current benefit from the asset behind the gift. Funding the gift with appreciated assets, the donor can make a substantial gift while retaining current benefit from the asset behind the gift.
Funding the gift with appreciated assets, the donor can make a substantial gift to us, avoid capital gains taxes on the sale of the asset and very likely increase the income produced by the asset. At the same time, the donor receives a charitable income tax deduction based on the donor’s age, the percentage return and the current market value of the asset. There are several different instruments which are used to create these income-producing gifts. Each has its appropriate and special applications.
Life-income-gift tax benefits are generous and are based on the projected value of the property which will ultimately be transferred to the Foundation. Capital gains taxes on appreciated property used to make the life-income gift are either completely avoided or deferred.
Types of charitable trusts
Charitable Remainder Trusts
A charitable remainder trust is an irrevocable trust. The trust income is paid to beneficiaries for their lifetime or term of up to 20 years. After that time, the principal is paid to the Foundation. You may tailor the annual income from the trust to be a fixed amount (annuity trust) or a percentage of the principal’s value (unitrust). You may also decide the payout rate you want to receive as long as there is an actuarial probability that at least 10% of the principal will be left for the Foundation at the time of your death.
The trust may be funded with cash or other property. Appreciated property, including securities and real estate which you have owned for over a year, is an excellent source of funding. Capital gains taxes are not paid by the donor at the time the property is transferred to the trust or when the trust later sells the property to diversify the assets. With the right planning, a life insurance policy can replenish the funds passed to us so heirs receive the equivalent amount outside the estate. In this way, the Mercy & Unity Hospitals Foundation receives a substantial gift, and heirs can receive the same amount as us free of estate taxes. The potential monetary benefits to you are a higher income and substantial tax savings.
Charitable Remainder Annuity Trust (Fixed Income)
A donor may choose to arrange an Annuity Trust, from which the donor will realize a set percentage of the original gift. The donor may not add to the original gift but may make subsequent gifts establishing separate Annuity Trusts.
Charitable Remainder Unitrust (Variable Income)
The donor may choose to arrange a Unitrust, from which the donor may realize a fixed percentage of the gift valued each year, also payable at least annually. The Unitrust the donor creates may also provide for future additional gifts to increase the size of the Trust.
Net Income Unitrust
A type of charitable remainder unitrust, this trust is designed to pay to the donor whichever is less – its net income for the year or the specific fixed percentage amount. This trust may also provide that for years in which trust net income exceeds the specified amount, the excess income may be used to “make up” for past years in which the income was less than the specified amount.
A trust of this type is ordinarily used when the charitable remainder trust is to be funded with unimproved real estate or another type of asset that produces relatively little or no income.
Another use for this trust is in retirement planning. Trust assets are invested voluntarily by the trustee in low-yield, high-growth assets during working years, then at retirement the gains are taken within the trust and the principal amount is reinvested to high-yield assets to fund retirement needs.
These trusts are designed to start out as a net income unitrust, which “flip” to become straight-payout unitrusts following a triggering event. A triggering event generally must be an event outside the control of the trustee or any other person. Events may include marriage, divorce, birth or death. The sale of an unmarketable asset is also a permissible triggering event.
Charitable Lead Trusts – Providing an Inheritance and a Gift to Us
A donor may choose to make an irrevocable gift through with their assets to Mercy and Unity Hospitals, through the Foundation, while providing an inheritance to children. A charitable lead trust is a gift of income to us, and is the mirror image of a charitable remainder trust. The initial or “lead” interest is for the benefit of Mercy and Unity Hospitals.
You transfer the assets to a lead trust, which distributes income to the Foundation for a term of years. At the end of the term, the trust distributes the assets, usually to children or grandchildren. Income received by the Foundation from the trust is used for the purposes you specify. The lead trust is generally a lifetime gift; however, you can establish a testamentary lead trust (at death) that would provide similar benefits to your estate, as you would enjoy during your lifetime.
This trust is a specialized estate planning tool. By establishing a charitable lead trust, you are in effect, “lending” the assets to the Foundation for the term of the trust. It is especially valuable if you have substantial estate and gift tax liabilities because it allows you to achieve several goals through one gift:
Of all the charitable gift options available to donors, this trust is among the most complex and can be a very powerful tool in gift and estate tax planning. There are many issues to consider – both legal and personal – when considering the establishment of a charitable lead trust. In the end, you may find that such a trust represents one of the best ways to help Mercy and Unity Hospitals while planning a deferred transfer of assets to children.