Charitable Remainder Trust Case Study
Dennis Werth, age 70, is retired and owns $100,000 worth of appreciated stock, which he purchased many years ago for $20,000. The stock yields a modest annual dividend of 3%. Dennis would like to increase retirement income for himself and his wife Jane (also age 70) by reinvesting in higher yielding securities, but if he sells the stock, he will be forced to pay a federal capital gains tax of $16,000. Instead, he establishes a charitable remainder trust through the Boston Foundation, naming himself and Jane as the income beneficiaries. Because the trust is tax-exempt, it can sell and reinvest the assets for a higher yield without having to pay a capital gains tax on the sale.
The charitable remainder unitrust will pay Dennis and Jane 6% of the trust assets each year for their lives. Their distributions increase immediately from $3,000 to $6,000 per year and will grow over time if the trust assets appreciate in value, but will always represent 6% of the trust value. Following the deaths of both Dennis and Jane, the remaining principal will be used to establish the Werth Family Fund, a permanent Donor Advised Fund at the Boston Foundation of which family members are fund advisors.
Summary of benefits*
Original trust principal
|
$100,000
|
Immediate income tax deduction
|
$36,389
|
Income tax savings (at 39.6% bracket)
|
$14,410
|
Capital gain tax savings (20% of $80,000)
|
$16,000
|
Net cost of gift
|
$69,590
|
First year distribution to beneficiaries (6%)*
|
$6,000
|
Projected after-tax benefit to income recipients
|
$114,449
|
Projected charitable gift to Family's Advised Fund
|
$219,112
|
*Gift calculations are provided for illustrative purposes only. The actual values may vary based on the timing of the gift.
Charitable Gift Annuity Case Study
Pam Cates, age 70 and a retired painter, transfers $50,000 of appreciated stock, which she bought for $30,000, to the Boston Foundation in exchange for an immediate annuity of 7.5% ($3,750 a year) for her life. Of this amount, $1,139 will be treated as a tax-free return of principal. At the end of Pam's lifetime, the remaining assets will pass to the Boston Foundation Arts Fund.
Immediate Gift Annuity Summary of benefits*
Gift principal
|
$50,000
|
Income tax deduction
|
$19,858
|
Income tax savings
|
$7,864
|
Annual income for life (at 7.5%)
|
$3,750
|
Tax-free portion
|
$1,139
|
Gains not taxed
|
$7,943
|
Projected after-tax benefit to annuitant
|
$45,765
|
Projected charitable gift to Arts Fund
|
$94,937
|
Estate Taxes
|
Reduced
|
*Gift calculations are provided for illustrative purposes only. The actual values may vary based on the timing of the gift.
Charitable Lead Trust Case Study
Dr. Marion Jackson, a pediatrician, establishes a charitable lead annuity trust through the Boston Foundation with appreciated securities worth $500,000 (purchased for $300,000). She directs that the trust pay the Boston Foundation's Community Fund $40,000 per year for 15 years. At the end of the trust term, the remaining trust assets are to be distributed to her children. Based on Treasury table calculations, the present value of the gift to the Boston Foundation (which is not deductible by Dr. Jackson for income tax purposes) is valued at $368,965, and her children's remainder interest is valued at $131,035 ($500,000 minus $368,965).
If on Dr. Jackson's death the trust assets have appreciated to $1,000,000, only the value of the gift to her children at the time the trust was created ($131,035) would have been subject to gift tax. The balance of $868,965 ($1,000,000 less $131,035) will escape gift and estate tax. In addition, none of the $1,000,000 will be includable in Dr. Jackson's estate for estate tax purposes.
Note: Should Dr. Jackson's children sell the asset after the trust is terminated, their cost basis in the property will be $300,000 (the same as Dr. Jackson's) for purposes of determining capital gain.
Gift calculations are provided for illustrative purposes only. The actual values may vary based on the timing of the gift.