All trusts are the same in principle. They involve placing legal title to assets in the custody of a trustee to be managed for the benefit of another person or purpose. Charitable trusts are structured with a lead, or primary interest, and a remainder, or secondary interest; one of these will be the charitable interest. Trusts may be established during your lifetime or provision made for their establishment in your will. Though some trusts are revocable, i.e. able to be changed, charitable trusts are irrevocable.
Charitable Remainder Trust: A Charitable Remainder Trust is an individual trust agreement. It allows you to make a gift to SABA while retaining an interest in those assets in the form of annual payments made to you or someone you designate. The terms of the trust may be for life or a period of time up to twenty years. The payments may be fixed or variable. At the end of the trust term, the trust assets revert to SABA. Charitable Remainder Trusts allow you to
Example: Dr. Brown wants to make provision for promising international students in behavior analysis but needs to secure funds for the education of her last child. She funds a charitable remainder trust with the transfer of stock currently valued at $100,000, which she purchased many years ago for $10,000.
Dr. Brown stipulates that the trust provide an annual payment for ten years equal to 8% of the trust's annual valuation. If the trust assets retain their current market value, she can expect an annual income of $8,000 or more per year; however, should the value of the trust assets drop, her return would likewise be diminished. At the end of ten years, the trust remainder will revert to SABA to establish a scholarship for international students as Dr. Brown intends.
By directly assigning appreciated securities to the trust, Dr. Brown avoids payment of capital gains tax on their sale. In addition, Dr. Brown may claim a current tax deduction for the present value of SABA’s remainder interest in the trust. Dr. Brown must pay current income tax on her annual payment from the trust.
Pooled Income Fund: A Pooled Income Fund is a charitable trust that allows you to combine your contribution to SABA with those of other donors in a managed fund. Such a fund permits participation with smaller contributions. Annual income from the trust is distributed proportionately among the participants or to persons they designate. The remainder interest in the trust is then claimed by SABA. Pooled income trusts
Example: Dr. Arnold is one of five members of the Experimental Analysis SIG, all former students of Dr. Jones. Each SIG member contributes $20,000 in his honor to a pooled income trust. Eventually, the trust assets will generate an endowed scholarship named for their friend and mentor. In the meantime, Dr. Arnold will continue to receive a pro rata share of income from the trust. This year Dr. Arnold may claim the present value of the charitable remainder interest of his contribution as a current tax deduction. In future years his share of the annual income from the trust will be taxed as ordinary income.
Charitable Lead Trust: A Charitable Lead Trust is designed to preserve principal. It is the opposite of a Charitable Remainder Trust in that SABA claims the lead interest while the remainder interest reverts to you or your heirs. Depending on how it is structured and funded, a lead trust may or may not yield current tax advantages. A lead trust is attractive because it
Example: At the birth of her grandson, Dr. Miller places $250,000 in a charitable lead trust until the child is eighteen years old. In the interim, she designates that SABA receive $10,500 annually from the trust for a total of $189,000 over eighteen years. While benefiting SABA's current needs, these contributions limit the trust assets subject to gift tax. The gift tax on the child's remainder interest is determined according to Treasury regulations at the time the trust is created. When the child reaches eighteen, the trust will be terminated and the proceeds distributed to him without obligation.
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