Making Gifts While Providing for Inheritances

Making a temporary gift

Did you know there is a way to make charitable gifts using funds that are eventually returned to you or your loved ones? Known as a charitable lead trust, this increasingly popular plan can be used to achieve what might otherwise seem to be conflicting goals. Consider the benefits of a charitable lead trust:

• You arrange for a series of gifts from the trust to fund teaching, research, and community service activities at UA that will begin immediately and continue for as long as you wish.
• The amount of the gifts to UA can be fixed or vary over time.
• You or your advisors can continue to manage the trust, if desired.
• Such a gift can serve to reduce or eliminate income, estate, and gift taxes now - and in future years as well.
• You may be able to provide younger heirs with a larger inheritance than would otherwise be possible at a time when it is more appropriate that it be received.

Many are familiar with other gift planning tools that feature annual income for you or others you choose. Under these plans, when income ceases, any remaining funds are transferred to The University of Alabama. Under the terms of a charitable lead trust, however, UA immediately begins to receive gifts in the form of payments from the trust and the gifts continue for the period of time you determine. At the end of that time period, assets remaining in the trust are returned to you or other loved ones you designate.

Gift and estate taxes are normally due on amounts over a certain amount given to others during lifetime or through your estate. Because of the front-end gifts to the University over time from a charitable lead trust, however, Congress allows you to reduce the amounts that would otherwise be taxable by the value of those charitable gifts.

Depending on the amount of the payments, how long they last, and other factors, it can be possible to greatly reduce, or even entirely eliminate, gift and estate tax on unlimited amounts ultimately passing to heirs. In addition, at the termination of the trust your heirs can receive any growth in trust assets during the time the trust is in existence free of additional gift and estate taxes.

As you can see, the charitable lead trust can be an especially attractive way to meet multiple personal and charitable planning goals.

Interactive Example

Mr. and Mrs. Walker would eventually like to leave $1,000,000 to one or more heirs. An advisor has estimated it will be necessary to leave a much larger amount to heirs for them to actually receive $1,000,000 after estate taxes. An alternative to making an estate transfer may be to fund a charitable lead trust for $1,000,000 that would first benefit The University of Alabama before becoming a gift to heirs. The trust will make payments for charitable purposes each year equal to 6% of the amount used to fund the trust, or $60,000. No income tax will be owed on the earnings of the trust as they are received by the University. The payment amount will be fixed and will not change over the term of the trust, which it is decided will be 20 years.

At the end of the 20-year period, after charitable gifts totaling $1,200,000 have been made, the heirs named in the trust will receive $1,000,000, or whatever other amount remains in the trust. Because of the charitable gifts to be made from the trust over the term of the trust, there will be a gift and estate tax deduction of $902,648 allowed at the time the trust is created. Even if the assets in the trust grow in value during the term of the trust, there will be no additional gift or estate tax due when the heirs receive the funds at the termination of the lead trust.

To summarize the results:

• A wonderful gift has been made to fund programs of their choice at UA for 20 years of payments in the amount of 6% of the initial trust value ($60,000) per year, for a total of $1,200,000.
• Heirs will receive an inheritance of approximately $1,409,955 at the end of the trust term based on an assumed trust earnings rate of 7%.
• A gift or estate tax deduction of $902,648 will reduce the taxable portion of the assets placed in trust to $97,352.
• Avoided taxes on the income from the property used to fund the trust that they would have otherwise paid during the period the trust is in existence.

Please use the Contact Planned Giving form or e-mail mailbox@advancement.ua.edu for more information about the tax and other benefits of charitable lead trusts.

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The assumed date of transfer for this example is March 11, 2010. This example has used the January 2010 IRC Section 7520 discount rate of 3% to optimize the charitable deduction.

NOTE: This illustration is provided for educational purposes only. The type of assets transferred, the actual date of the gift, and other factors may have a material effect on tax and other economic benefits as a result of making the gift described. The advice of your tax and other financial advisors should be sought before implementing a gift of this type.

Replacing gifts with life insurance

Life insurance can be used in many ways to help you make charitable gifts more effectively. One example is the use of life insurance to "replace" funds in your estate that have been devoted to charitable use. The life insurance policy proceeds thus serve to provide an inheritance for heirs that might not otherwise be available.

For example, you might use the tax savings and all or a portion of the income generated by a charitable remainder trust or other gift plan to purchase life insurance benefiting your heirs. That way, The University of Alabama receives the gift you intend, while your heirs enjoy their inheritance—often at little cost to you or your heirs. Check with your life insurance professional or other advisors for additional information regarding this option.