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Charitable Remainder Annuity Trusts

A stable source of income

A charitable remainder annuity trust provides a way to avoid fluctuations in interest rates and ensures that the donor or someone designated by the donor receives a fixed income. A donor may make a gift of cash, appreciated securities or property to set up the trust either during her or his lifetime or through a will.

This trust agreement locks in a long-term annuity rate and designated beneficiaries receive regular annuity payments for life, or joint lives, or for a term of up to 20 years. The rate chosen depends on prevailing market conditions.

A gift to the community

Ultimately, the remainder in the trust becomes the property of the Jewish community and is used to meet its most critical needs, or to support an organization or cause the donor can specify.

Tax benefits

Should the donor elect to use appreciated property to fund the trust, he or she will avoid any initial income tax on the capital gain. The contributed property is received by the trust at its fair market value, and the annuity rate is multiplied by this value to calculate the payments to the income beneficiaries. In addition, the donor will be entitled to a current income tax charitable deduction based on the present value of the anticipated remainder — which will ultimately be paid to the Jewish community.

Example:

A donor decides to contribute stock worth $20,000, which costs her $5,000, to a Charitable Remainder Annuity Trust. The trust then disposes of the stock and reinvests the proceeds. The trust is credited with the full value of the stock, and neither she nor the trust is charged initially for payments of income tax on the capital gain. The trust provides income at a fixed rated of, for example, 7%, guaranteeing payments of $1,400 per year ($20,000 x 7%).

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Charitable Remainder Unitrusts

Income for life and a lasting gift to the Jewish community

Income for life

A Charitable Remainder Unitrust provides a way to obtain an income for life which can grow as the funds invested in the trust grow. The unitrust provides a variable payment, based upon a fixed rate multiplied by the current value of the assets in the trust at the beginning of each year. If trust assets grow, the increasing value of the trust portfolio will result in larger annual payouts. A gift of cash or appreciated property (e.g., stocks or real estate) is used to set up the trust either during a donor's lifetime or through his or her will. This trust agreement fixes a unitrust rate, and donors or their designated beneficiaries receive regular payments of income for life or joint lives, or for a period of time not to exceed 20 years.

Tax benefits

When the donor contributes appreciated property to fund the trust, he or she avoids any initial tax on the capital gain. The contributed property is received by the trust at its fair market value, and the unitrust rate is multiplied by this value to calculate the initial periodic payment to the income beneficiaries. In addition, the donor is entitled to a current income tax charitable deduction based on the present value of the anticipated remainder.

Example:

Stock worth $20,000, which costs the donor $5,000, is contributed to a Charitable Remainder Unitrust, which then disposes of the stock and reinvests the proceeds. The trust is credited with the full value of the stock and neither the donor nor the trust is charged initially with income tax on the capital gain. The trust provides income for life at a unitrust rate of, for example 7%, providing you with payments of $1,400 the first year ($20,000 x 7%).

Thereafter, the value of the securities is established on the first business day of each calendar year, and the unitrust rate is applied to this new value to establish the payment for the current year. If for example, the trust assets had increased in value to $25,000, the payment for the year would be $1,750 ($25,000 x 7%).

It must be noted that in periods of investment loss, the value of the trust will be reduced and the payments to the beneficiary will be lower. However, over long periods of time investments in securities have tended to increase in value. Donors wishing a fixed payout can consider a Charitable Remainder Annuity Trust which provides that benefit.

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