Charitable Remainder Trust
A charitable remainder trust allows a donor to transfer assets into a separately managed trust that will provide beneficiaries named by the donor with payments for life or for a period of years. The donor decides the payout rate of the trust in consultation with the trustees he or she selects. The minimum payout is 5%. The trustees have the responsibility to manage the assets of the trust, provide tax statements to the IRS and the beneficiaries, and issue beneficiary payments on a periodic basis. Penn currently serves as trustee of many charitable trusts and provides these services to donors and beneficiaries of those trusts.
There are two types of Charitable Remainder Trusts:
CHARITABLE REMAINDER UNITRUST
This trust pays the donor or other named beneficiaries a fixed percentage of the principal in the trust as it is valued annually. Unitrust payments are taxed to the donor based upon the type of income earned by the trust. Additional gifts can be made to a unitrust at any time.
CHARITABLE REMAINDER ANNUITY TRUST
This trust makes annual payments fixed at a specific percentage of the value of the trust when it is established. Additions to an annuity trust are not permitted.
Benefits of a Charitable Remainder Trust
- Eligible for an immediate income tax deduction for a portion of your gift to the unitrust
- Capital gains tax advantages when appreciated assets are contributed
- Designated beneficiaries receive payments for life or a term of years
- Additional gifts can be made to a unitrust at any time
- Generous support of Wharton at trust termination
A HEDGE AGAINST INFLATION
Ronald, W’66 and Dianne Hill, ages 69 and 67, have had a long relationship with Wharton. They now wish to do something to show their gratitude for all that Wharton has done for them. The Hills decide to establish a charitable remainder unitrust that will pay them 5% of the trust assets annually. They initially fund the trust with $100,000 in stock which they purchased many years ago for $30,000. The gift entitles them to an income tax deduction of almost $40,000 in the year they fund the trust. They like the idea that the trust may provide a hedge against inflation as well as the fact that they can add to the trust at any time. The Hills are pleased that the trust will pay no capital gains taxes on the sale of their stock.
The Hills have accomplished the following:
- Provided themselves with annual payments for life with the potential for growth.
- Obtained capital gains tax advantages.
- Removed assets from their taxable estate.
- Received an income tax charitable deduction.
- Following their lifetimes, an endowment in their names will be created at Wharton.
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