Bequests and Living Trusts
A bequest is a gift of property or assets to a beneficiary as defined in a will. There can be long-term tax benefits because charitable bequests can reduce estate taxes. In addition, there are the emotional rewards that come with planning a charitable gift that will be meaningful to the charity and will benefit society. There can be other tax benefits as well if the bequest involves appreciated assets.
Specific language (see bequest information) is used to effect a bequest. The examples provided here are for general information - please consult your attorney to make sure your wishes are properly carried out. There is additional information available about the benefits of utilizing a charitable bequest.
A living trust is a trust set up during the life (and can operate after the death) of the person or people establishing the trust. With a revocable living trust you can change your mind and have some or all of the trust property returned to you during your life. An irrevocable trust cannot be changed except in certain legal circumstances. Charitable gifts may be made through a living trust upon the death of the trustor. See Living Trusts for more information.
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Gifts of Appreciated Securities (and other assets)
The gift of an appreciated asset, often common stock or mutual fund shares, is a valuable way to make a contribution to a charitable organization and receive tax benefits based on the value of the asset(s). Appreciated assets have a higher market value than their basis or tax purpose value (which is, in most cases, their cost). Such assets would, if sold by an individual or non-charitable organization at a price higher than their basis, potentially generate taxable capital gains.
The donor receives a charitable tax deduction based on the current market value of the gift and avoids tax on any capital gains. The charitable recipient sells the asset, realizes the full market value, and as a nonprofit does not have to pay tax on any capital gains.
Giving appreciated securities instead of cash is a method often used to increase the cost or basis value of securities you want to hold for further appreciation. Suppose you hold a number of shares of a startup company with a cost basis greatly below the current market value. Anything you sold would incur capital gains. But, suppose you gave some or all of the stock to charity and then purchased the same number of shares at the current value in the marketplace. Your gift would be the same. But instead, you now have shares of stock with a higher basis and you have significantly reduced your future capital gains liability on your shares in the company. And, you have a charitable gift deduction equal to the current value of the stock you gave.
While the gift of appreciated assets often involves stock, other marketable assets, such as land, antiques, and real estate, can be utilized as potential gifts with the possibility of valuable tax benefits. However, these other assets are reviewed on a case-by-case basis. For more information about gifts of appreciated assets, please contact us so we can respond to your specific needs.
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Charitable Gift Annuities
A charitable gift annuity is used by many donors to provide income for the annuitant and, sometimes, a second beneficiary. The annuitant (the person providing funds to the charity) receives a contract or agreement from the charity which states that the charity will pay the annuitant(s) a fixed income for life, with payments to start immediately or at some set future time (deferred). The income paid under the annuity is secured by the assets of the charity.
Rates on charitable gift annuities are based on the annuitant's age and whether the contract is immediate or deferred. To request a personalized charitable gift annuity illustration, please click here to fill out the response form and send us the appropriate information. To view current gift annuity rates, click here. To view an example case, click here.
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Deferred Charitable Gift Annuities
An attractive benefit of this arrangement is that it can be used as a "charitable retirement plan supplement." This plan enables a donor to make a gift now and take a charitable income tax deduction while in a higher tax bracket. Income may be deferred until after retirement, when the rate of tax will presumably be lower. Deferred gift annuities are creative ways to delay income to pay for children's or grandchildren's college expenses, supplement your retirement income, or assist with future assisted-care living arrangements.
A part of each payment, as in any gift annuity, may be tax-free for a period of years. However, the precise amount of each payment will depend on the tax rules in effect when the payments start.
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Charitable Remainder Trusts
A charitable remainder trust is established for the life of the donor (the trustor or grantor) and/or for the life of any beneficiary(ies). While there are certain changes that may be made, once the trust is established, it cannot be revoked. If it is desired, the income period of the trust can be established for a specified period of time not to exceed twenty years. The twenty-year maximum does not apply if the trust life is based on the life expectancy of the income beneficiary(ies).
A charitable remainder trust is an attractive planning tool for the disposal of highly appreciated assets. While the assets revert to the charity rather than the heirs of the estate, the use of an irrevocable life insurance trust in conjunction with a charitable remainder trust could replace the asset's value for the heirs.
There are two different types of charitable remainder trusts.
- A charitable remainder unitrust (see example) is a popular way to achieve tax benefits as well as a fixed annual percentage on the value of the assets in the trust. The assets are revalued annually and, if the trust value changes, the payment to the beneficiary(ies) changes.
- A charitable remainder annuity trust is set up to pay a fixed rate of return based on the initial valuation at the time the property is placed in the trust. The trust assets are never revalued.
Charitable remainder trusts provide a good degree of flexibility that is valuable in charitable gift planning.
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Charitable Lead Trusts
A charitable lead trust is often called the reverse of a charitable remainder trust. During the term or life of the charitable lead trust, an annuity or unitrust income interest is distributed each year to the designated charitable beneficiary and the assets are eventually transferred to the trustor's or grantor's designated non-charitable beneficiary(ies).
The charitable lead trust is a powerful way to make a future transfer of assets to your heirs at a significantly reduced gift and estate tax cost, while also providing Millikin University with income. During a specified number of years, the lives of one or more individuals, or a combination of the two, an annual contribution is paid out of the trust to Millikin University. A lead trust may be structured to provide a fixed dollar contribution (charitable lead annuity trust) or a fixed percentage contribution (charitable lead unitrust). At the end of the trust term, the assets pass to the beneficiariesnamed by the donors.
You can fund a charitable lead trust with cash, publicly traded securities, closely-held stock, income-producing real estate, partnership interests, or a combination of the above. You can establish a charitable lead trust during your lifetime, or as a testamentary trust through your will.
There are two basic types of Lead Trusts: Non-Grantor and Grantor.
- In a non-grantor charitable lead trust, the most common type, the trust assets revert to your children, grandchildren, or other heirs at the end of the trust term. A non-grantor charitable lead trust provides a gift tax charitable deduction and is useful in reducing the cost of intergenerational wealth transfers.
- In a grantor charitable lead trust, the trust assets revert to you, rather than to your heirs, at the end of the trust term. Donors creating grantor charitable lead trusts receive a large charitable contribution income tax deduction. Such a gift structure may be particularly useful if you wish to make a multi-year pledge and accelerate future deductions into the current year.
Donors establishing a charitable lead trust should be advised by an attorney who is experienced in the area of charitable trusts and estate planning.
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Gifts of Real Estate
Depending on the circumstances that are involved, gifts of real estate can be an effective means of planning a gift. While the first thought often is a home or farm, real estate also can involve a vacation or second home, an apartment or commercial building, a shopping center, or undeveloped land.
Gifts of real estate can enable us to make significant contributions. Each piece of property and its unique circumstances must be carefully reviewed by the prospective donor and receiving charity to determine the suitability of the property as a gift. Generally speaking, a rule of thumb is that an acceptable piece of property is one that is unencumbered and can be readily sold.
There are many ways to donate property. It can be an outright gift, a retained life estate, or it can be placed in a trust.
If you are considering a gift of real estate to Millikin University, please contact us.
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Gifts of Life Insurance
There are several ways you can use life insurance as the basis for a future (and often sizeable) charitable gift.
- Making Millikin University a Beneficiary of Your Life Insurance Policy
You may wish to make Millikin University the beneficiary (or a contingent beneficiary) of a life insurance policy. You retain lifetime ownership of the policy, keeping the right to cash it in, borrow against it, and change the beneficiary again. A gift of this nature is treated much like a bequest made through your will. Because you retain the ownership of your asset (the policy), you will not receive an income tax charitable deduction for this future gift or for your premium payments during your lifetime. The policy's proceeds will be included in your gross estate, and your estate can take an estate tax charitable deduction.
- Making a Gift of Your Policy
You may wish to transfer ownership of a policy to the charity, or to purchase a new policy with the charity as owner and beneficiary. If you make a charity the owner and beneficiary of a policy, you are entitled to certain tax advantages, including full deductibility of premium payments.
- Wealth Replacement Using Life Insurance
A donor may make a current gift to charity and receive a charitable tax deduction. At the same time, the donor may purchase life insurance to replace the donated amount, or perhaps, the amount that the beneficiaries would have received after estate tax. Depending on the circumstances, the charitable tax savings and any life income resulting from the gift may defray the cost of the wealth replacement insurance premiums.
As with all matters concerning estate planning, please consult your estate and tax specialists.
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Gifts of Retirement Assets
Qualified retirement plans can provide an excellent opportunity for growth, as they grow tax-free; the growth or earnings are not taxed annually. The earnings are taxed when they are withdrawn. Additional tax savings can occur if the recipient is in a lower tax bracket when the funds are withdrawn (for example, during retirement) than when the investments were growing.
However, careful planning concerning the withdrawals from retirement funds needs to be done. Not only is there a potential income tax burden, but if there is a balance in your retirement account at your death, there may be estate taxes as well. Taxes could eat up as much as 75-80% of retirement assets under certain circumstances.
Using qualified retirement plan funds is an excellent source of assets to fund bequests. By designating Millikin University as a beneficiary (or a contingent beneficiary after the death of a spouse), funds pass to Millikin free of taxes. It is possible to set up the charitable beneficiary as the recipient of all of the remaining funds in the account, or to designate a percentage.
Please note - the designation of Millikin University as a beneficiary of retirement fund assets cannot be simply written in your will or trust. Millikin University must be designated as a beneficiary of the retirement plan.
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