A charitable remainder annuity trust can help you maintain or increase your income for life while making a significant gift to Georgetown Day School. The trust payments are the same amount each year, offering the security of fixed income.
A charitable remainder annuity trust is right for you if:
- You want to provide income for yourself or others.
- You itemize your deductions and want to save income or capital gains taxes.
- You want to maintain or increase your income.
- You want the security of predictable payments for life or a term of years.
- You want to make a generous gift to GDS.
- You are considering a gift amount of $100,000 or more.
Separate trust
A charitable remainder annuity trust is a tax-exempt trust governed by an irrevocable trust agreement. You choose the trustee who is responsible for administering your annuity trust and guiding the investment of its assets. Georgetown Day School may also act as trustee.
Irrevocable gift
A charitable remainder annuity trust is an irrevocable arrangement. Once you transfer assets to the trust, you cannot change your mind and get the assets back. This requirement ensures that whatever value remains in your annuity trust when it ends will be used to support GDS.
Payments the same each year
Each year, your annuity trust will pay a fixed dollar amount.
Remaining assets to Georgetown Day School
When your annuity trust ends, all of its remaining principal will become available to support GDS.
You choose the payment amount
You choose the amount that your annuity trust distributes each year. The payment amount must be at least 5% of the initial value of your trust. A payout of 5% to 6% is typical. Payments are usually made in annual, semiannual, or quarterly installments.
Who can receive payments?
You decide who will receive the payments from your annuity trust. Usually, this will be you, or you and your spouse. You can, however, select other people to receive the payments. For example, you may wish to provide income for parents, a sibling, or children.
How long do payments last?
While most annuity trusts last for one or two lives, other terms are possible. An annuity trust can last for more than two lives, for a specific length of time of up to 20 years, or for a combination of lives and years.
Tax benefits
- Earn an income tax charitable deduction, if you itemize.
- Avoid capital gains tax.
- May reduce estate taxes and probate costs.
You will receive an income tax charitable deduction in the year of your gift. If you cannot use the entire deduction that year, you may carry forward your unused deduction for up to five additional years.
If you donate appreciated assets to fund your annuity trust, you will not pay any capital gains tax when you make your gift. In addition, because an annuity trust is tax-exempt, it will not pay any capital gains tax when it sells these assets. This means that your trustee will be able to reinvest the full value of the assets you donate. By removing the gift assets from your estate, you may reduce estate taxes, if your estate exceeds the estate tax credit, and you may also reduce probate costs when your estate is settled.
Taxation of payments
The taxation of annuity trust payments depends on the trust’s past distributions and investment performance. Payments are typically taxed as ordinary income. If the trust is funded with appreciated assets, a portion of the payments could be taxed at lower capital gains tax rates in some years. It is possible for a portion of the payments to be tax-free in years when there is not enough ordinary income and capital gain income to make the payments.
Assets to consider giving
The following assets make excellent sources for funding your charitable remainder annuity trust:
- Cash that you currently have in a savings account, bank CD, money-market fund, or other safe but low-yielding investment.
- Securities, especially highly-appreciated securities.
Example
Lillie is 84 and a grandparent of an alumna. She has various appreciated stocks in her brokerage account with a combined value of $500,000. The stocks cost $200,000 to purchase and provide her with approximately $10,000 in annual dividend income. Lillie would like to increase her cash flow, not worry about market fluctuations, and arrange for a significant gift tp Georgetown Day School.
After consulting with her advisor, Lillie finds that creating a charitable remainder annuity trust will meet her needs. She transfers her $500,000 in stock to an annuity trust with a 5% payout rate.
Benefits
- Lillie will significantly increase her cash flow from her gift assets, from $10,000 per year to $25,000 per year.
- She will receive an income tax charitable deduction of about $360,905*.
- Her trustee will be able to sell her stock immediately to diversify her trust's investments without paying any capital gains tax. As a result, all of her assets will be working for her and for Georgetown Day School.
*Lillie’s income tax charitable deduction will vary depending on the timing of her gift.