Tom's Top 10 Charitable Trust Questions
Tom Basso ’74 spoke recently with Sal Cania, director of gift planning, to review the questions Tom asked before he created his charitable remainder trust at Clarkson, and how the process of gathering information guided his decision to use a charitable trust to help achieve his philanthropic and financial planning goals. Tom felt the questions he asked might be useful to others who are considering how a charitable trust might work for them. Here are Tom’s top 10 questions, and Sal’s answers:
1. How is a charitable remainder trust different from other trusts?
A charitable remainder trust is a tax-exempt entity that allows a donor to make an irrevocable gift to the trust and receive an income tax deduction and income for life from that trust before the remainder ultimately passes to Clarkson.
2. What is the best asset to use to fund my charitable trust?
That depends on individual circumstances. Charitable trusts are most often funded with cash, appreciated stock, and/or real estate. Many times a donor will use an appreciated asset, donating the asset at the appreciated value and avoiding the taxable consequences of selling the asset, yet still receiving an income tax deduction and income for life. This can be a great way to diversify a large block of stock or convert real estate to income.
3. What are the costs to create a charitable trust?
If a trust is funded at Clarkson, there is no cost to create the trust document. Clarkson recommends that donors meet with their counsel to review the draft before signing final copy, which may be a cost to the donor. In cases where an appraisal is required before property goes into a trust (real estate, oil leases or illiquid company stock, for example), the donor is responsible for the cost of the appraisal since it will determine the amount of their income tax deduction.
4. How is my payout rate determined?
By law, the payout rate for a charitable trust can be no lower than 5%. Most Clarkson charitable trusts are in the 5-6% range, depending on individual circumstances. The payout rate is specified in the trust document and cannot be changed. It is important for you to consult with Clarkson and your advisors to select a rate, since it will affect your income tax deduction, your future income stream and, eventually, your final residual gift to Clarkson.
5. Who manages the trust and what are the management costs?
Clarkson has worked with BNY Mellon Wealth Management since 1999 to manage and invest all of our charitable trust assets. Mellon handles all of the accounting and beneficiary payments, and prepares K-1 income tax statements each year. Clarkson charges nothing to manage its trusts, and we pay a 1% annual fee to Mellon out of trust assets.
6. How much is the income tax deduction from a gift to a charitable trust?
When someone makes a gift to a charitable trust, a portion of their gift is allowed as an income tax charitable deduction. That portion is determined by the age(s) of the income beneficiary(ies) and a “discount rate” published by the federal government each month. Generally, the older the income beneficiary(ies) and the higher the discount rate, the larger the amount of the tax deduction.
7. Will my income payments change from year to year?
There are two types of charitable trusts. Charitable remainder annuity trusts make a fixed payment each year. Charitable remainder unitrusts make payments based on an annual revaluation of trust assets, and therefore trust payments will vary year to year. Over 95% of charitable trusts created in the United States are unitrusts.
8. Can I add gifts to my trust into the future?
Future gifts of any size may be added to a charitable remainder unitrust. Additional gifts cannot be added to a charitable remainder annuity trust.
9. Will my trust gift count in Clarkson fundraising totals?
All gifts to Clarkson charitable trusts count at full value in Clarkson’s Evolution to Excellence fundraising campaign, towards annual Roundtable recognition, and towards your next anniversary reunion.
10. What portion does Clarkson get from my trust, and when?
Clarkson holds and invests the entire amount of the trust for the life of the trust. When the trust terminates, Clarkson uses the remainder for whatever purpose the donor documents in the trust. The remainder amount will vary depending on life expectancy and investment performance.
Talking with someone who has already created a charitable trust can be very useful to someone who is considering one, so Tom has offered to help anyone who has questions about funding a trust at Clarkson. You may contact Tom confidentially at firstname.lastname@example.org.
Tom Basso '74 & Brenda Russell-Basso created their charitable trust at Clarkson in 2008.
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