CHARITABLE TRUSTS

Many families rely on investment income to maintain their standard of living, especially people who are retired. Quite often, these families are reluctant to sell assets that have appreciated in value due to capital gains tax liability. A form of charitable trust enables a family to transfer assets to a trust. These assets - corporate stock, real estate, etc. - may then be sold without being subject to capital gains taxes. The family enjoys the income from the trust for life. The assets of the trust then pass on to the Society after the death of the last beneficiary. A charitable trust may be a useful tool to families who fit the following pattern:

• They have significant appreciated assets.
• They have assets that are not producing income.
• They are reluctant to sell the assets due to capital gains tax liabilities.
• They would like to increase the income from these assets.
• They have a desire to make a major gift to the Society.

Charitable Gift Annuity - This is a legal contract between the donor and the charitable organization, through which the donor exchanges cash, stocks, or other assets for an agreed-upon income for life. The donor qualifies for an income tax deduction the year when the gift is made. In addition, a portion of the income received is tax-free, and capital gains taxes may be reduced if the annuity is funded with appreciated stocks or securities. After the income recipient(s) have passed away, the corpus of the annuity will be used by the Society as designated by the donor.

Example:
Janice Smith, age 79, donates $25,000 cash to the Society for a charitable gift annuity. Based on her age, she will receive a fixed payment of 9% for life. This will produce an annual income of $2,250, of which $1,368 is tax-free. She will also qualify for an income tax deduction of $11,452.50. After her lifetime, the corpus will be used as she has designated.

Charitable Remainder Trusts - A charitable remainder trust (CRT) is a tax-exempt trust that pays all or a portion of its income to one or more beneficiaries for a specified term. At the expiration of its term, the remainder interest passes to the designated charity. Generally, a CRT is used when a donor would like to make a gift to the Society, but does not want to give up the present income stream that could be generated by the property. There are two forms of CRTs - the annuity and the unitrust.

Income from a unitrust is variable, increasing if the value of the trust increases and decreasing if the value of the trust decreases. Unitrusts invested for growth over the long term can be a hedge against inflation.

Through the annuity trust, the yearly payout amount does not change; it is set when the trust is established and must be at least 5% of the initial trust value.

Example:
Bill Smith, age 70, owns stock worth $1,100,000 for which he originally paid S100,000. He donates the stock to a charitable remainder unitrust to benefit the Society. He receives an income of 6% of the trust's value, which initially pays him $66,000 a year. After his lifetime, the Society will receive the assets remaining in the trust, which is estimated at $1,240,000 due to growth in trust assets.

Summary of Advantages of CRT versus Outright Sale of Assets:

• $10,800 in increased annual income ($66,000 - $55,200 = $10,800)
• $225,000 in income tax savings from charitable deduction
• $495,000 in estate tax savings
• Assets avoid probate
• Satisfaction of leaving assets to a worthy cause

Charitable Lead Trusts - This trust is established by a donor transferring assets to a trust that provides income to a nonprofit organization for a period of years. At the end of that period, the trust assets revert either to the donor (grantor) or to someone else the donor designates (non-grantor). Therefore, the Society receives an income stream for a period of years, while the donor receives a current gift tax deduction for the value of the Society's interest in the trust. Gift tax is then due only on the present value of the remainder that eventually goes to a beneficiary and in some cases, no gift tax is payable. Even if trust assets appreciate by the time the trust term ends, no additional gift or estate tax will be due when the beneficiaries receives the trust assets. However, the beneficiaries may incur some capital gains tax ramifications.

Example:
John Jones establishes a lead trust, valued at $500,000, to benefit the Society. The arrangement will pay the Society an annual income 5% of the trust's value for 15 years, starting with an initial payment of $25,000. Over the term of years, the sum of payments to the Society is estimated to total $456,597. At the conclusion of the trust's term, the corpus of the lead trust, which has grown to $815,502, passes to Mr. Jones' family. In addition to benefiting the Society, Mr. Jones receives a charitable gift tax deduction of $236,585 at the time of the gift and is able to pass on $315,502 in growth to his family, which will end up saving $173,526 in gift or estate taxes.

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http://www.botany.org/BSA-Legacy/BSALegacyForm.pdf