Charitable remainder trusts
A charitable remainder trust offers you a variety of options for selecting an income structure that works for you.
Annuity trust: fixed income payments for life
If you are age 55 or older, an annuity trust can be established by transferring cash or securities in trust to the University. If you select the University, as trustee, it manages the trust for you and/or other designated income beneficiaries. The trust provides you with an annual fixed income amount that is at least 5 percent of the initial fair market value of the trust assets. These fixed payments continue for your life and the lives of any other beneficiaries. Any income earned by the trust that exceeds the annuity amount is added to the trust principal. If trust earnings are insufficient to meet the annuity amount, principal is used to make up the deficit.
An annuity trust entitles you to a current-tax-year charitable deduction. In addition, you avoid having to pay capital gains tax on the appreciation in the year of the gift and can instead spread this liability over a period of years. Upon the death of the last surviving income beneficiary, the assets in the trust pass to the University. A gift of $100,000 or more can be used to fund an annuity trust. No additional contributions can be made to this type of trust.
Unitrust: variable income based on market value
A charitable remainder unitrust is similar to an annuity trust but is more flexible and offers potentially higher income possibilities. Unlike the fixed payments from an annuity trust, the annual income from a unitrust is a fixed percentage of the fair market value of the trust assets, as revalued each year. Furthermore, additional contributions may be made to a unitrust at any time. If you are considering a gift of real estate, a unitrust may be an effective way to generate your flow of income from the property.
A unitrust can be an excellent hedge against inflation. Because the income payments to you are tied to the changing value of the trust assets, your payments will fluctuate. As the value of the trust assets grows over the years, your income payments will increase. However, if the value of the trust assets declines, your income payments will decrease. To establish a unitrust, a gift of $100,000 or more is required and you must be age 55 or older.
Term trusts: temporary income for a specified period
A term trust may take the form of an annuity trust (fixed payment) or a unitrust (fixed percentage of the trust’s annual fair market value), with the same advantages as a life-income trust. If you use appreciated property to fund the trust, you avoid capital gains tax liability on the transaction, the beneficiary’s income may be taxed at ordinary and capital gains rates, and some income may be tax-free. As a donor, you receive a charitable deduction based on the value of the property given, the payout rate, and the term of years. Recipients of the income may be anyone designated by the donor.
The Phoenix Trust
Now when you fund a charitable remainder trust with the University of Chicago, you have the opportunity to have it invested in units that participate in the University’s endowment. Known as the Phoenix Trust, this option may be of interest to qualified new and existing trust donors who seek exposure to a wider range of assets and the possibility that the endowment may outperform other investment strategies over the long term. For a charitable remainder trust to be eligible, the University must serve as the Trustee and be the irrevocable beneficiary of 100 percent of the trust’s remainder.