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I received a post card from one of my universities (Univ of Oregon) offering a Charitable Remainder Trust. For a 75 year old couple making a donation of $250K, they claim a payout rate of 5% giving $12.5K income per year (taxable as ordinary income) and a tax deduction of $123.127K for the year donation is made, almost half.

For those faced with required minimum distributions after age 70-1/2 when already in a higher income tax bracket, CRTs could be an attractive option. You save half of the taxes and gain steady income.

The fine print says the $12.5K resets each year to 5% of the cash value of the trust on Jan 1. That implies income grows if the trust earns more than 5% on its assets, but in these low interest days the asset can be consumed gradually and your actual income may decline.

Also deduction amount will vary with age, marital status, and interest rates.

In the example, I presume CRT pays for your life or the life of your spouse. On death of the last, trust goes to the charity designated, in this case UofO. Tax deduction is based on actuarial tables estimates of your life expectancy.
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I too am a U of O grad, but I haven't received such a post card. Hmmm. They must like you more than they like me...or recognize you as someone of means :-)

This sounds like a CRUT or charitable remainder unitrust. Generally, the way these work is the trust will accept any kind of marketable securities you wish to donate, which, when administered by a trustee appointed by the charity (U of O foundation), the assets are usually sold and the proceeds asset allocated per the IPS of the trustee...often a bank or private investment manager or if the charity is large enough, its own asset manager. With a CRUT, at least 5% of the trusts value as of the beginning of a calendar year must be distributed to the trust beneficiary, which is usually the donor (you), although it could be a third party. This payout continues either for a fixed period or through you or your spouse's lifetime, the longer of. The tax character of the 5% distributions will be 'worst-first' of the trusts earnings for the year, which will be ordinary income (for realized interest and non-qualified divideds) long term capital gains, qualified dividends and then return of principal, reported to you each year on a K-1. I believe the trustee fees are taken out first...and they are usually around 1%/yr as I recall.

You are incentivized to contribute highly appreciated securities, as there is no long term capital gains tax upon donation. The current year charitable deduction depends on the trusts residual % target (which must be at least 10% of the donated amount), the discount rate used (called the Applicable Federal Rate, which changes each month), you and your spouses life expectancy, the frequency of the payments and the expected annual distribution amount. Its a present value calculation...but generally, the higher the discount rate, the higher the target residual rate, the smaller the annual distribution and the shorter the life expectancy, the greater will be the net present value and thus the greater the current charitable deduction. Of course, you need to itemize to get this deduction.

Not sure what the RMD you mention has to do with this...unless you are concerned about the added tax it creates, and the CRT is one way to generate yearly income to pay this added income tax??

Most I've occasioned who use a CRT will have it set up themselves and administer it themselves, as they can then set their own withdrawal rate, residual target and investments, which have to use the principals of MPT, as I recall.

Other than the immediate tax benefit, when set up and administered by the charity, it (the University Foundation) may provide you with a life benefit if you/your spouse live beyond life expectancy or if the trust runs out of money (unusual), but be sure to check with them, as this can vary.

Go Ducks!!

BruceM
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