Planned Giving
Life Income Gifts
A life-income gift results in the donor (or a person the donor designates) receiving income for life; after the income-beneficiary dies, the University uses the gift as intended by the donor. Life-income gifts have tremendous benefits for people who want to make a major gift to Carolina but need to keep the income their assets can produce, for example, to fund their retirement years. There are differences among kinds of life-income gifts, but their common advantage is twofold: income to the donor or a designated beneficiary and favorable tax treatment. Here are a few life-income gifts with these advantages:
Charitable Gift Annuity (Current and Deferred)
Two important notes: (1) The legal and tax aspects of making a life-income gift mean a donor must seek expert assistance from a qualified tax advisor. (2) A life-income gift is irrevocable; the donor cannot later change his or her mind.
Charitable Gift Annuity - Current
A charitable gift annuity is a type of life income gift that pays a fixed dollar amount for life in exchange for an irrevocable gift to Carolina. The minimum initial contribution is $5,000. The amount of income is determined by the donor's age (one-life annuity) or the donor's age and the age of another beneficiary (two-life annuity). The maximum rate of return on an annuity is 8.0 percent, which represents the rate received if the income beneficiary is 80 years old or more.
Gift Annuity Rates
One-Life* |
Two-Life* |
||
| Donor's Age | Rate of Return | Donor's Age | Rate of Return |
| 55 | 5.5 | 55-55 | 5.0 |
| 60 | 5.7 | 60-60 | 5.4 |
| 65 | 6.0 | 65-65 | 5.6 |
| 70 | 7.1 | 75-75 | 6.3 |
| 80 | 8.0 | 80-80 | 6.9 |
*Current rates -- subject to change.
A gift annuity qualifies for immediate income tax benefits. A portion of the gift is tax deductible as a charitable contribution, and a portion of the income received each year is tax-free. Furthermore, if a gift annuity is funded with long-term appreciated securities, the donor may also receive additional tax advantages. A portion of the capital gain on the appreciation is avoided. In addition, any reportable capital gain is spread over the donor's life expectancy rather than all in the same year.
And consider these benefits of a charitable gift annuity...
Are you helping your parents with monthly expenses or medical costs?
A gift annuity is not only a good way to make a gift to Carolina, it can also be a creative way to help your parents. A charitable gift annuity may be a way that you can continue to support your parents by providing them with an independent source of income. You make a gift to Carolina's gift annuity program and name your parents as the income beneficiaries. The rate of return will be based on your parents' life expectancy. They receive a quarterly income check from the UNC-Chapel Hill Foundation - and it can be deposited directly into their checking account! You receive an income tax charitable deduction for a portion of the gift, and you can designate the remainder to benefit any school, unit or program on campus. There may be gift tax issues involved so if you are interested in exploring a gift to support your parents, we are happy to provide information to share with your financial advisors.
Do you need a steady source of income to cover health care expenses?
Another creative way to use a charitable gift annuity is to help cover the costs of retirement communities or assisted living fees. A fellow Tar Heel needs to cover a fixed fee for assisted living at a local retirement community. Her assets included shares of stock that were highly appreciated. In the past couple of years, she had sold some shares to cover the fee but then had to pay capital gain taxes. Recently, she made a gift to Carolina's gift annuity with the remaining stock and received a charitable income tax deduction on a portion of the gift. Since the annual annuity amount is fixed, she knows that she will have the resources each year to cover her health care costs.
Charitable Gift Annuity - Deferred
A deferred charitable gift annuity is a type of life income gift that allows you to defer the income until a later date, such as retirement, while claiming an immediate income tax deduction. You may determine the deferral period, and the annual income is higher when the payments begin. Like the charitable gift annuity, when funded with appreciated assets, a deferred gift annuity enables a portion of the appreciation to escape capital gains tax entirely.
Pooled Income Fund
The UNC-CH Pooled Income Fund is similar to a mutual fund in that individual contributions are "pooled" for investment purposes. The net income of the entire fund is distributed on the basis of the number and value of "shares" held by each donor. Because gifts are irrevocable, they qualify for an income tax charitable deduction based on the age of the beneficiary(ies) and the performance of the fund. The quarterly payments the beneficiary(ies) receive are taxed as ordinary income. The minimum initial contribution is $5,000, and the minimum for additional contributions is $1,000. A maximum of two beneficiaries can be named to receive income for life, but each must be at least 50 years old when designated. When a gift is funded with appreciated assets, capital gain on the appreciation is avoided.
Charitable Remainder Trust
A charitable remainder trust is similar to other types of trusts except that it has a charitable beneficiary. A donor transfers property irrevocably to a trust and specifies how the income and principal are to be distributed. The trust can be funded with cash, real estate or – ideally – with long-term, highly appreciated securities to avoid the capital gain on the transfer to the trust. The trustee**, who is designated by the donor, manages and invests the assets and pays to the beneficiary an income of usually between 5 and 8 percent for life or for a term of years.
There are two types of charitable remainder trusts: a unitrust which pays a variable income based upon a percentage of the fair market value of the trust's assets, as revalued annually, and an annuity trust which pays a fixed amount each year -- at least 5 percent of the market value of the assets at the time the trust is established. Furthermore, the Internal Revenue Code provides three variations of a unitrust.
Standard Unitrust - provides for payout to the beneficiary of the fixed percentage specified in the agreement even if it is necessary to invade principal.
Income Only Unitrust - a variation of the standard unitrust, provides for the payout to the beneficiary of either the net income of the trust or the fixed percentage specified in the agreement, whichever is less.
Income Only Plus Makeup - the income only unitrust may include a "makeup" provision that allows the trust in any subsequent year in which the income exceeds the stipulated percentage to distribute the excess income to makeup for any deficiencies that may have occurred in prior years. A deficiency in any year represents the difference between the stated percentage and the net income.
Flip Trust - a flip trust is a charitable remainder trust which begins as a net income or net income with makeup unitrust and then "flips" to a straight payout trust at a particular "triggering" event. This has become the most popular type of trust to use when considering funding the trust with real property.
An annuity trust is different in that it provides for payment to the income beneficiary of an amount that is fixed and is predictable. The payment must be at least 5 percent of the market value of the assets and is valued only at the time the trust is established. As with the unitrust, a high payout rate inhibits growth of principal and reduces the charitable deduction.
**Trustee
In most situations, the individual setting up a charitable remainder trust is free to name the trustee. It can be an individual such as a friend, a family member, a legal advisor or financial advisor, an institutional trustee like a bank or trust company or the donor can even serve as trustee. In certain limited situations, The University of North Carolina at Chapel Hill Foundation, Inc., may agree to serve as trustee with the investment and management handled by our investment office.
Legal Issues
Although the Office of Gift Planning is happy to provide information and sample trust agreement forms, the University cannot provide legal advice. The establishment of a charitable remainder trust is a significant financial decision, and the University cannot advise you on the appropriateness of a gift for your individual circumstances. We have an attorney on staff with estate and charitable giving expertise, and we are happy to provide help and information. However, the decisions will be for you and your advisors to determine. Additionally, it will be your responsibility to have your own attorney set up the charitable remainder trust documents at your expense.
Beneficiary
You may name yourself, your spouse, or other persons to receive the income from the trust. It is also possible to designate Carolina as one of the income beneficiaries as long as there is at least one non-charitable income beneficiary. This last option may be an excellent opportunity to make a current gift to Carolina while also planning a gift for the future.
Remainder Minimum
In The Taxpayer Relief Act of 1997, Congress passed a law requiring a minimum 10 percent charitable remainder interest for unitrusts and annuity trusts established after July 28, 1997. The value of the remainder now must be at least 10 percent of the net fair market value of the property transferred in trust. For unitrusts, the 10 percent interest is measured on each transfer to the charitable remainder trust. A charitable remainder trust that meets the 10 percent test on the date of transfer will not subsequently fail to meet the test if interest rates have declined between the trust's creation and the death of a measuring life.
Remainder Designation
Carolina is grateful to be named as a remainder beneficiary of a charitable remainder trust, and the University adds these gifts to its list of future expectancies. In order for the fair market value of a charitable remainder trust to be recorded in our academic gift totals and added to a donor's gift record, the remainder designation must be irrevocable; this means that the donor relinquishes the right to change the remainder beneficiary.
If you have questions about any of these gifts, please contact:
Candace Clark
Associate Director of Planned Giving
Office of University Development
candace_clark@unc.edu
(919) 962-3967
