FAQs About Planned Giving Strategies

Giving through a charitable remainder trust allows you (or someone you select) to receive income for the life, knowing that whatever remains will benefit your community. You do this by placing cash, property, or other assets into a trust that distributes to the “income beneficiary” an annual income for life or for the duration of the trust. You receive an immediate tax deduction for the present value of the gift in the year the gift is made. After death or the end of a specified trust term (up to 20 years), the remainder of the trust transfers to a fund you have named or to a specific charitable organization. Grants from the fund will be make in accordance with your interests.

Yes. Payments from such a charitable remainder trust can be made to the donor or grantor for life and then made to his or her spouse or some other beneficiary after death.

The payments can initially go to some other beneficiary for his or her lifetime. The eventual distribution to a fund here will take effect only at the death of the last of the individual beneficiaries.

Payments from trusts like this are made in one of two ways:  For as long as the trust lasts, a fixed amount may be received each year—in effect, a guaranteed income. Such a trust is called an Annuity Trust.

Or a specified percentage of the trust’s value, recomputed annually, may be paid each year. In each year, if assets increase in value, payments would also increase. This type of trust is called a Unitrust.

The tax laws require that the fixed amount to be paid out each year equal at least 5% of the initial value of the property placed in the annuity trust (it can be higher, but not lower); or at least 5% of the annual value of the trust assets in the case of a unitrust.

These trusts are sheltered from current income taxation because the income is distributed and the principal is held for charitable purposes. If low-yielding securities are placed in the trust, the trustee could sell them and reinvest the proceeds in issues paying higher yields, and neither the trust nor the income beneficiary will have to pay any tax on the capital gains that are realized at that time.

The beneficiary of the trust will pay a federal income tax on amounts distributed by the trust to the extent that the trust has, at any time, realized ordinary income and capital gains, the payments being treated as first coming from the trust’s ordinary income and then from capital gains. Accordingly, depending upon the amount of the payments and the amount of the trust’s income, there may be no tax on the capital gains attributable to the sale of the appreciated securities.

No matter which payment method is selected, the donor enjoys a number of benefits. These include professional management of the assets in the trust and a degree of financial protection. The creation of one of these trusts frequently has a significant advantage in that it enables the donor to enjoy greater spendable income.

The opportunity to increase the yield from securities by switching investments without capital gains tax at the time of the creation of the trust, and thereafter the advantage of tax-sheltered growth can frequently help the yield and the investment performance of a charitable remainder trust. The skill and experience of a professional trustee can also help.

...to cover the payment to the income beneficiary?

If you do not want to invade principal to pay the income beneficiary, an income-only unitrust may be the answer because it makes payments only out of income. In addition, the trust instrument may provide that if income has not been enough to cover the unitrust payments in prior years, income in excess of that amount in later years can be used to make up the shortfall.

Or a "flip" trust might be the solution, changing from a net income unitrust to a standard unitrust upon the occurrence of an event, such as the sale of low-income producing assets contributed to the trust.

An immediate federal income tax deduction is available, and the amount of the deduction will be determined using Treasury Department tables that take into consideration such factors as:

1. Whether it is a unitrust or an annuity trust;
2. The amount or percentage to be paid out each year;
3. The number of persons to whom the payments would be made; and
4. The age of the persons receiving the payments.

You will be allowed to claim a deduction on the federal income tax return filed for the year of the gift, subject to the then-prevailing percentage limitations on charitable gifts.

A CRT created upon the donor’s death gives rise to an estate tax charitable deduction for the value of the charitable remainder. And payments are made to the individual beneficiary for his or her lifetime.

Where the remainder will come to Community Funds for a purpose we have approved, we are happy to consider serving as trustee. We will need to review the proposed trust agreement, the asset proposed to be contributed, the payout terms, and likely duration of the trust. Please contact Jane Wilton to discuss further.

...and, on their death, to a fund in The New York Community Trust?

There is an alternative trust know as a qualified terminable interest property (Q-TIP) trust with a charitable remainder. This type of trust can be created during the donor’s lifetime or by will. The donor’s spouse must be given the right to all of the income for his or her life, and at death the trust property can pass to a fund in The New York Community Trust.

A significant advantage of the Q-TIP trust with a charitable remainder is that the trustee may be given the power to invade the principal of the trust for the spouse’s benefit, which is not true with a charitable remainder trust. This can significantly increase the flexibility of the trust to meet unexpected family needs.

The trustee or trustees would be any bank or individual, or combination thereof selected by the donor, including, in some cases, the donor or his or her spouse. 

Under a charitable lead trust, which can be created by a deed of trust or by will, an annuity or unitrust payment from the trust is paid to a fund in The New York Community Trust for a designated period of time, at the end of which the principal would be paid to a non-charitable beneficiary selected by the donor.

A charitable lead trust created by will can cut down substantially on estate taxes because of the charitable deduction for our charitable interest in the annuity or unitrust payment. The value of the charitable interest, or course, depends on the length of the trust and amount or percentage to be paid out each year. The saving in estate taxes means that the members of the donor’s family may ultimately receive more than if the property were left to them at the donor’s death.

Similarly, a charitable lead trust created during the donor’s lifetime generally eliminates income taxes on the income from the assets placed in the trust because the amounts paid to charity are fully deductible against the trust’s income. It also reduces the gift tax on the property eventually passing to children or grandchildren, provides for charity, and ensures that the property passes intact.

Yes. Many people find in later years that they don’t need all the insurance they did when they were younger. They donate the policies to the funds they established here. If a policy is fully paid up, the tax deduction is either the replacement value or the donor’s cost, whichever is less.

If a policy is not paid up and the donor decides to contribute the premiums, those amounts become deductible as charitable contributions. In either case, the donor gets an immediate tax deduction and substantial estate tax savings later.