Life-Income Plans:
Charitable Remainder Trust
Charitable Gift Annuity
What follows is a general introduction to charitable life-income plans. Whether or not you are considering San Francisco Opera as a charity of choice, you should find everything in this explanation useful for your consideration.
Lifetime Income To You or Your Loved Ones
Generally, you may fund your charitable life-income plan with cash, stock, real estate, or a combination. Assets placed in a life-income plan are invested by the trustee to pay you or your beneficiary (such as a friend or relative), called “income beneficiaries,” income for life or for a predetermined term of years. After the income beneficiaries’ death, or upon the end of the term, the remainder passes to charity.
Other Benefits
Your life-income plan may provide you with some important tax benefits:
1) An immediate income tax deduction for a percentage of your gift. We will be happy to give you an idea of the size of your deduction. Simply provide us with the age of the income bene-ficiary(ies) and, if you are considering a trust, the payout rate you would like from the plan.
2) No tax on the sale of appreciated property. From your point of view, this is often the most important tax benefit. Sometimes thousands of dollars that would have gone to taxes remain in the plan, generating income to you or others.
3) The plan principal avoids estate tax. Property that might otherwise be subject to estate tax is preserved from that tax entirely.
Funding a Life-Income Plan with Real Estate
Appreciated real estate can be an excellent asset to fund a life-income plan, especially a trust. Mature investment properties are frequently earning only two, three or four percent of their fair market value per year. When these properties are sold and the proceeds reinvested by the life-income plan, earnings often jump to a considerably higher rate. Under ordinary circumstances, owners face substantial income tax on the capital gain when they sell rental properties or commercial real estate. Because the life-income plan will be selling the property, the capital gains tax is bypassed entirely when the real estate is sold. The same is true when selling appreciated stock.
Funding a Life-Income Plan with Cash or Stock
Gifts of appreciated stock are ideal for funding a life-income plan because the stock can be reinvested for greater income while completely bypassing capital gains tax.
Giving Part of Your Property
Some people find it useful to give an undivided percentage interest of their property into a life income plan rather than give all of it. For example, you could place 75 percent of a vacant lot into a charitable remainder trust. When the lot sells, cash would be paid directly to you, with the rest going into the trust. The cash to you is taxable, but the income tax deduction generated by the trust could offset the tax due on the cash received.
Charitable Remainder Trusts
There are two basic types of charitable remainder trusts. An annuity trust will pay a fixed amount for the rest of your life. This may be a good option for you if you are about 78 or older.
A unitrust will pay a fixed percentage each year, so if the value of the trust principal increases over time, income increases with it. We recommend a minimum trust of $250,000.
By law, the trust must pay you at least 5 percent of principal. You may choose a higher payout rate if you wish. Simply selecting the highest rate possible may not work in your best interest, however, because trust principal may decline under the strain of meeting the higher rate. As the principal declines, your income would decline with it. On the other hand, a lower payout rate may allow the principal to grow, and your income will grow with it. A lower payout rate will also tend to benefit the charitable beneficiary.
Selecting a Trustee
You must have a trustee for a charitable remainder trust. Your options include commercial institutions such as a bank or trust company; an individual with professional experience in trust management; or possibly yourself. There are many complications in acting as trustee for a remainder trust, but you can do this if you understand and comply with IRS regulations. San Francisco Opera Association does not presently act as trustee under its donors’ charitable trusts.
Charitable Gift Annuities
A charitable gift annuity is a simple contract between you and a charity. Unlike other life-income plans, a portion of the income is free of income tax. Annuities work best for those who are 70 or older. The older you are when establishing (or first receiving payments from) the annuity, the more income you and/or another income beneficiary will receive. San Francisco Opera is not currently licensed to issue gift annuity contracts; however, you have a couple of options that will benefit the Opera: Silicon Valley Community Foundation and the National Gift Annuity Foundation both issue charitable gift annuities that allow you to designate the Opera as beneficiary. We would be happy to provide salient information about the process and foundations. You can also find information on each of these organization’s websites here:
National Gift Annuity Foundation: https://nationalgiftannuity.org/
Silicon Valley Community Foundation: https://www.siliconvalleycf.org/donors/charitable-giving-options/charitable-gift-annuities
For More Information
The basic advantages of life-income plans are easy to understand: Avoidance of capital gains tax on the sale of appreciated property, lifetime income, immediate income tax benefits, reduction of any estate tax, and the satisfaction of providing for a good cause. As noted, these plans can even benefit your loved ones. But the first thing you should do is find out if a life-income plan makes sense for you.
If you are interested in obtaining more information, please contact us at the Opera’s legacy giving office. Thank you for requesting this information, and for supporting San Francisco Opera.
Maude Engström
Legacy Giving Manager
(415) 565-3242
mengstrom@sfopera.com
legacygiving@sfopera.com