A charitable remainder trust provides the donor with a specified annual lifetime income and immediate tax saving. The underlying gifted assets go to the the Frederik Meijer Gardens & Sculpture Foundation upon the donor's death. (Note: A charitable remainder trust can also be funded at death to benefit one or more persons during their lifetime(s) with the remaining gifted assets going to the Frederik Meijer Gardens & Sculpture Foundation upon the death of those individuals.)
A Foundation supporter owns $500,000 in highly appreciated stock with a cost basis of $50,000. His goal is to provide for a pond and wetland garden in memory of his deceased wife. The stock pays $10,000 (2%) in dividends each year. He donates the stock to a charitable remainder trust, reserving an annual income of 6% of the value of the trust ($30,000) for his lifetime. In addition to quadrupling his annual income and deferring or potentially avoiding capital gains tax on the sale of the stock, the donor receives a tax deduction equal to the present value ($200,000) of the gift. The present value is calculated based upon the percentage of the annuity, the donor’s age and IRS tables.
|Federal income tax savings ($200,000 x 25%*)||- $50,000|
|Federal capital gains tax deferred** ($500,000 - 50,000) x 20%||- $90,000|
|MI income tax deferred** ($500,000 - 50,000) x 4.35%||- $19,575|
|Estimated net cost to the donor||$340,425|
|Plus annual income for life to donor||$30,000|
Benefit to the Foundation
At the time of the donor's death, the principal of the trust, $500,000 more or less depending upon investment performance, will be transferred to the Foundation to be used for the installation and maintenance of a pond and wetland garden area in memory of the donor's wife.
There are two types of charitable remainder trusts: annuity trusts and unitrusts. An annuity trust pays a fixed percent of the initial fair market value of the trust. A 6% annuity trust funded with $500,000 would pay the donor(s) $30,000 per year for life. A unitrust pays a fixed percent of the annual fair market value as of the first day of the year. In our example, if the $500,000 trust went down in value, the annual payment would go down. If it went up in value, the annual payment would go up. Most donors and charities prefer unitrusts invested for growth so that if the investments are successful, both the income increases for the donor and the remainder value increases for the charity. Older donors often prefer the security of a fixed annuity for the rest of their lives.
* Individual federal income tax rates vary.
** Capital gain taxes are deferred. Capital gains taxes are paid as income is distributed to the donor.