A charitable trust is a common vehicle that provides an immediate tax deduction, tax-efficient income for one (or more) beneficiaries, and ultimately a charitable gift to one (or more) tax-exempt charities such as Mount Holyoke College. The minimum funding amount for a trust at Mount Holyoke is $100,000 and additional funding may be added to the trust at any time.
Separate, Irrevocable Trust
A charitable trust requires an irrevocable document drawn up by legal counsel, and the trust itself is considered its own entity with a unique federal tax ID. A trustee of your choosing, which can be Mount Holyoke College, is appointed to manage the trust investments and administer the trust. The primary idea of a trust is to have the principal grow more than the payout rate so that over time, the payout increases. A trust can also ultimately benefit more than one charity.
Should you choose to name Mount Holyoke as trustee of your trust, as long as the College is 51% ultimate beneficiary, the College will absorb the legal costs of writing the trust agreement. Mount Holyoke requires $100,000 as the minimum funding amount to establish a trust managed by the College.
Payments vary with value of unitrust
Each year, your unitrust will distribute a fixed percentage of its current value, as revalued annually. If your unitrust's value goes up from one year to the next, the payments will increase proportionally. Likewise, if your unitrust's value goes down, the payment amount will also go down.
You choose the payment percentage
You choose the percentage of its value that your unitrust must pay each year to its income beneficiaries, typically 5%. It is to your advantage to choose a relatively low payment percentage so that your unitrust’s assets have the best chance to grow. If the value of your unitrust grows, so will its payments. Payments are usually made in annual, semiannual, or quarterly installments.
You can include special payment provisions in your unitrust that make it a good way to give debt-free real estate or other assets that may take time to sell. In this situation, you can limit your unitrust's payments to its net income or its unitrust percentage, whichever is less. This way, your trustee can take whatever time is necessary to sell your assets at a fair price.
Who can receive payments?
You decide who will get the payments from your unitrust. Usually, this will be you, or you and your spouse.You can, however, select anyone elseto receive the payments. For example, you may wish to provide income for parents, a sibling, children, or friend.
While most unitrusts last for one or two lives, other terms are possible. A unitrust can last for more than two lives, for a specific length of time of up to 20 years, or for a combination of lives and years.
- Receive an income tax charitable deduction.
- Avoid capital gains tax.
- May reduce estate taxes and probate costs.
You will receive an income tax charitable deduction in the year of your gift. If you cannot use the entire deduction in the year of the gift, you may carry forward your unused deduction for up to five additional years. If you give appreciated securities to fund your unitrust, you will not pay any capital gains tax when you make your gift.
In addition, because a unitrust is a tax-exempt trust, it will not pay any capital gains tax when it sells these assets. This means that your trustee will be able to reinvest the full value of the assets you donate. By removing the gift assets from your estate, you may also reduce estate taxes if your estate exceeds the then applicable estate tax credit. You may also reduce probate costs when your estate is settled. The amount of these savings will depend on the size of your estate and on estate tax law in force at the time your estate is settled.
Taxation of payments
The taxation of unitrust payments depends on the past distributions and investment performance of the unitrust. Your unitrust income will typically be taxed mostly or completely as ordinary income, but it is possible that a portion could be taxed at lower capital gains tax rates, or even tax-free, in some years.
Add funds anytime
You can make additional gifts to your unitrust anytime. Additions earn an additional income tax charitable deduction that may save you income taxes if you itemize your deductions. You will also increase future payments without the effort and expense of creating a new unitrust.
Assets to consider giving
The following assets make excellent sources for funding your charitable remainder unitrust:
- Cash that you currently have in a savings account, bank CD, money-market fund, or other safe but low-yielding investment.
- Securities, especially highly-appreciated securities.
It is also possible to create a unitrust using real estate that is debt-free or other assets that may take time to sell.
Mount Holyoke College as Trustee of your CRUT
Mount Holyoke College works with Kaspick & Company, a subsidiary of TIAA/CREF, to manage its trusts. Each individual trust is reviewd on a yearly basis to ensure that the trusts are meeting the needs of the donors - to the best of our ability. As an added benefit, trust donors and beneficiaries have secure online access to their account through the Kaspick & Company website.
Download a PDF of Kaspick Overview Document.
Susan '62 is 76 years old and her husband Ken is 75. Many of the stocks in their portfolio have appreciated substantially in value over the many years the Fongs have owned them. They are enthusiastic about making a major gift to support Mount Holyoke College, and they also welcome a way to receive greater income from their investments without paying a big capital gains tax.
After consulting with their advisor, the Fongs find that a 5% charitable remainder unitrust funded with $500,000 in assets will meet their needs perfectly. They fund their unitrust with $400,000 in stocks plus $100,000 from a money market fund. They paid a total of $75,000 for the stocks, which currently produce about 2% in dividends each year. Their money market fund has been earning about 2% interest annually.
- The Fongs will receive $25,000 in payments in the first year of their unitrust, significantly increasing the income they had been receiving from these assets. If the income and appreciation of the trust's investments, net of costs and fees, total 7% annually, their payments will grow to over $33,647/year* in 16 years.
- The Fongs will receive an immediate income tax charitable deduction of about $252,560**.
- The Fongs' trustee will be able to sell their stock immediately in order to diversify their unitrust's investments without paying any capital gains tax.
- Assuming its investments earn a 7% net annual return on the unitrust's investments, over $686,393* will be left in the Fongs' unitrust to create a fund in their name, providing scholarship aid to students into perpetuity.
*The future payment amounts and principal amount remaining for Mount Holyoke College will be lower if the Fongs' unitrust earns less than 7% annually.
**The Fongs' income tax charitable deduction will vary slightly depending on the timing of their gift.
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