A charitable remainder trust is a formal trust agreement through which donated assets are irrevocably transferred to a trustee (one or more individuals, a bank, or a trust company) and in return, you and/or another designated person will receive income for life or for a term of years. Upon completion of the term, the assets then pass to the Central Park Conservancy to support Central Park. When you create a charitable remainder trust, a portion of your gift is tax deductible. Because a charitable remainder trust is tailored to your specific needs, you determine the length of the trust and the payout rate – both of which have an effect on the tax deduction.
There are two kinds of charitable remainder trusts:
- An annuity trust that pays a fixed income
- A unitrust that pays a variable income
Since charitable remainder trusts are flexible they can be set up to supplement retirement funds, provide educational funds for children or grandchildren, or provide support for someone you care about. They can be created during your lifetime or through your will and may have substantial tax benefits.
How a Charitable Remainder Trust works
Sylvia Ramble is 82. She has loved spending time in the Park her entire life and, in addition to enjoying its beauty, has been fascinated by its history. Sylvia decides to create a charitable remainder trust that will, in the future, provide for the restoration and maintenance of the Park's bridges, arches, and historic structures.
She funds the trust with $250,000 of appreciated securities she has held for many years, which are currently yielding only about 3 percent, and sets up the trust to pay 6 percent. She knows if she sells the stock and purchases a higher-yield issue, the tax on the appreciation will consume almost a third of the proceeds, leaving considerably less to reinvest. The term of the trust she establishes is for her lifetime. At the end of that time, her gift will pass to the Central Park Conservancy to support the maintenance and conservation of the historic structures throughout the Park.
By establishing the trust she has:
- Doubled the income from her assets
- Avoided the capital gains tax that would be due if she had sold the stock in order to reinvest it
- Generated a substantial tax deduction
- The satisfaction of knowing she has helped preserve the history of Central Park
Appreciated assets, cash, unencumbered real estate, and retirement accounts are excellent assets to consider. No capital gains tax is due on the transfer, and you receive an income tax charitable deduction for a portion of the contribution in the year the trust is established. A minimum gift of about $250,000 is recommended.