We hope the following information will be helpful to you. We are always happy to help you understand the various special gift arrangements; however, we also strongly encourage you to seek the counsel of your own professional advisers when you are making important financial decisions. Barnard College cannot provide personal accounting, tax, or legal advice.
An annuity trust is a type of charitable remainder trust that pays out the same fixed dollar amount every year. This yearly amount is determined when the trust is established and, according to tax law, must be at least 5 percent of the initial fair market value of the trust's assets. See Charitable Remainder Trust below for additional information.
A bargain sale is part gift and part sale. A donor can give appreciated property to Barnard at a “bargain” price. Because capital gains are apportioned between the donor and the College, the donor reports a smaller capital gain and receives a charitable income tax deduction for the net value of the gift. (Note: Under current tax law, each individual has a $250,000 capital gain exemption on the sale of a primary residence.)
Fair market value of donor’s house: $1,000,000 (determined by a qualified appraiser)
Donor’s cost basis: $200,000
Capital gain in the property: $800,000
Here’s what happens:
Donor sells to Barnard for bargain price: $750,000
Value of the gift to Barnard: $250,000 ($1 million value less actual sale price)
Reportable capital gain: $350,000
Because 25 percent of the value of the property is a gift to Barnard ($250,000 out of $1 million), 25 percent of the capital gain is forgiven. The gain is $800,000, so 25 percent of the gain is $200,000. From her total gain of $800,000 the donor is left with $600,000 of reportable capital gain, of which $250,000 is covered by her individual exemption.
The final result: The donor has liquidated a $1 million property with only $350,000 (rather than $800,00) of reportable capital gain. In addition, she can claim a $250,000 charitable tax deduction.
A donor can name Barnard College in her will as the recipient of all or a part of her estate at death. A donor may also name Barnard as a beneficiary of her living/revocable trust, retirement plan, or life insurance policy; gifts of these kinds are also included under the umbrella term “bequest.”
The person or persons whom you designate to receive the benefits or proceeds of your financial instruments, including a will, any kind of trust, retirement plan, or life insurance policy.
A charitable gift annuity falls into the category of “life income gifts,” and is a way to make a gift to Barnard and also provide a guaranteed, fixed payment stream for the life of the donor or other designated beneficiary. Legally, a gift annuity is a contract between a donor and the College. A Barnard annuity may by created with a gift of cash or marketable securities. The gift assets are invested and managed in a special fund and are backed by the total assets of the College. The minimum annuity gift is $10,000.
An annuitant must be 65 years of age at the date of the agreement. Rates offered are based on the annuitant’s age at the time of the gift. Payments are made quarterly, and often a substantial portion of each payment is received tax free.
Gift annuities generate an immediate charitable income tax deduction. Capital gains are reduced dramatically and, if the donor is also the annuitant, can be reported over a number of years so that those taxes are not due all at one time.
Annuities based on two lives are also available, but the rates are generally lower.
A charitable lead trust is the reverse of a life income gift arrangement: the donor places assets in trust, and the trust generates annual income for charity over a period of years. After a specified length of time, the assets come out of the trust and become the property of the donor’s heirs or other designated beneficiaries.
The lead trust is a valuable means of transferring assets to heirs at reduced gift and inheritance taxes. Although the donor will likely pay gift taxes (and possibly generation-skipping taxes) upon creating the trust, the assets in the trust will grow tax free during its term (commonly 20 years, but varies depending on the donor’s goals). When the heirs receive the assets at the end of the trust term, there will be NO inheritance taxes applied to that transfer.
The donor can name multiple charitable beneficiaries to receive payouts from the trust during its term. Non-cash, income-producing assets, and assets that are expected to increase in value substantially over time, work well as choices to fund the trust. Commercial real estate is a good example of a non-cash asset that can be passed to younger family members through a charitable lead trust.
Charitable lead trusts are complex and require advice from experienced attorneys. In our experience it is inadvisable for donors to consider this type of trust for assets totaling less than $1 million.
Charitable remainder trusts are flexible “life income gift” instruments that enable donors to:
A donor can place an asset in a trust and designate a trustee to manage the trust. From that trust, the donor (or a person that the donor has named) receives a specified sum at set intervals—usually every quarter. When the donor or beneficiary dies, or after the predetermined number of years, what is left in the trust (the “remainder”) goes to Barnard College and/or other charitable organizations. The annual payments differ according to the kind of trust. Trusts are very well suited for gifts of cash and appreciated securities, and can also be funded with real estate, privately held stock or other non-cash assets.
The Barnard program offers both unitrust (variable income) and annuity trust (fixed income) options.
An annuity trust pays the same fixed dollar amount every year. This yearly amount is determined when the trust is established and, according to tax law, must be at least 5 percent of the initial fair market value of the trust's assets.
A standard unitrust pays a variable amount each year. The donor sets a payout percentage (at least 5 percent, due to the tax law requirement) when the trust is established, and that percentage is applied to the value of the trust assets once each year to determine the coming year’s distribution amount.
A net income unitrust also pays a variable amount each year. The amount is equal to the net income produced by the trust that year or a predetermined percentage of total assets, whichever is smaller. (Trust terms can provide that payments may be increased in some years to make up for earlier years when net income was lower than the predetermined percentage.)
A “flip” trust is a hybrid of a net income unitrust trust and a standard unitrust. This vehicle is especially useful when funding a trust with an illiquid asset such as real property or tangible personal property. Until the asset is sold, the trust only pays the lesser of the net income or the stated payout rate. Once the illiquid asset is sold, the trust “flips” and begins to act like a standard unitrust paying the stated payout rate.
Cost basis is the amount you paid for an asset such as shares of stock or real estate. When an individual receives an asset as a gift, generally she assumes the cost basis of the gift donor. When an asset is inherited, generally the cost basis is the value of the asset at the date of death of the individual who previously owned the property.
A deferred payment gift annuity provides a guaranteed, fixed payment stream for the life of the donor or another designated beneficiary beginning at age 65 or older. It is similar to a charitable gift annuity except the beneficiary’s income payments begin at a later date. That provides a higher charitable tax deduction when the gift is made and locks in a higher payout rate. For example, a 63-year-old donor agrees to make a gift now, but defers receiving payments until she reaches age 68 when it will serve as supplemental retirement income. The deferral of payments locks in a higher fixed rate.
The gift assets are invested and managed in a special fund and are backed by the total assets of the College. The minimum gift amount is $10,000. Annuitants must be at least age 65 when payments begin.
Deferred payment annuity rates (and thus annuity payments) are based on the age of the beneficiary at the time of the agreement and the length of time before the first payment will be received by the beneficiary (a longer deferral results in a higher rate).
A substantial portion of each payment is tax free. Even though the beneficiary does not start receiving payments until a pre-selected future date, a portion of the gift is immediately deductible, subject to certain limitations, for federal income tax purposes on an itemized return.
Capital gains are reduced and can be reported over a number of years (if the donor is also the income beneficiary).
Deferred payment annuities based on two lives are also available, but the rates are generally lower.
In certain circumstances, an estate tax is levied on transfers of assets that happen at death. Currently, an individual can leave up to $5 million to others before triggering the federal estate tax.
A “flip” trust is a type of charitable remainder trust; it is a hybrid of a net income trust and a standard unitrust. This vehicle is especially useful when funding a trust with an illiquid asset such as real property or tangible personal property. Until the asset is sold, the trust only pays the lesser of the net income or the stated payout rate. Once the illiquid asset is sold, the trust “flips” and begins to act like a standard unitrust paying the stated payout rate.
See Charitable Gift Annuity above.
A gift tax is levied on gifts to non-charitable beneficiaries. As of 2006, an individual can give away $13,000 (the “annual exclusion amount”) each year to as many people as she wishes without being subject to federal gift tax. Transfers over and above that $13,000 may be subject to gift tax. Beginning in 2011, tax law provides an individual may make gifts of up to $5 million over her lifetime before she will owe any gift tax; this does not include any gifts that fall within the annual exclusion amount.
Examples of life income gifts are charitable gift annuities (immediate and deferred payment), charitable remainder trusts, and the pooled income fund. With these charitable gift arrangements, individual beneficiaries receive income payments for their lives or a set period of time, and then Barnard receives the remaining funds.
A living trust is a document by which you direct the transfer of your assets at your death. A living trust can help assets pass outside of the probate process, can continue after your death, and is revocable at any time, according to terms of the trust agreement.
An asset held long-term is any asset that you have held longer than one year.
A gift to the Pooled Income Fund is pooled with other contributions in a professionally managed fund. The donor or other beneficiary receives a proportionate share of the Fund’s annual income for life. The income varies depending on how much the fund earns and the number of shares the donor holds in the pool. At the end of the beneficiary’s lifetime, the value of her shares is withdrawn from the Fund for the use of the College. In 2009, the rate of return was approximately 3.8 percent; the income of the Fund fluctuates depending on market conditions.
A donor can give a personal residence, such as a home or condominium, to charity and retain use of the property for the remainder of her life. The donor continues to live in the property yet takes a charitable income tax deduction for the “remainder” interest given to charity. The donor continues to be responsible for taxes, insurance and maintenance on the property until her death. If the donor chooses to move out of the property, the gift is accelerated and the donor may be able to claim an additional charitable income tax deduction.
A split-interest gift is any gift with both a charitable component and a component that benefits an individual (the donor or her designee). Charitable gift annuities, pooled income funds, charitable remainder trusts, and charitable lead trusts are all varieties of split-interest gifts.
The IRS defines tangible personal property as “any property, other than land or buildings, that can be seen or touched. It includes furniture, books, jewelry, paintings, and cars.”
A unitrust is a type of charitable remainder trust. A standard unitrust pays out a variable amount each year. The donor sets a payout percentage (at least 5 percent, due to the tax law requirement) when the trust is established, and that percentage is applied to the value of the trust assets once each year to determine the coming year’s distribution amount. See Charitable Remainder Trust for additional information.
Audra M. Lewton
Director of Gift & Estate Planning
Office of Development
New York, NY 10027
Phone: (212) 854-2001