A husband and wife once asked Eastern Mennonite Missions (EMM) if there was a way that their assets – mostly real estate – could benefit EMM and still provide their needed retirement income. They were interested to learn that a charitable remainder trust is designed to meet that exact need, and more.

Donors create a charitable remainder trust by a written agreement, or trust document. The agreement identifies the creator of the trust (who will gift assets to the trust) and its trustee (who will care for the assets during the life of the trust).

The written trust document also includes provisions detailing:
• who receives the income from the trust
• how much of the trust income is distributed
• when the trust will end
• who receives the trust assets when the trust ends


Income from the trust
Income from a charitable remainder trust may go to you as the creator of the trust, or to anyone else you decide to benefit. The trust may have multiple beneficiaries.

The amount of the trust income to be distributed may be quite flexible. You may choose to set the amount when you create the trust, and it will remain unchanged during the trust’s life. This is known as a charitable remainder annuity trust. Beneficiaries receive the same distribution from the trust each year.

Or, you may allow for a flexible distribution amount to be calculated each year, based on the market value of the trust assets. This is known as a charitable remainder unitrust. Most often, the trust agreement includes the percentage of market value to distribute to the beneficiaries each year.

For additional flexibility, the trust agreement may call for a distribution that is the lesser of the actual income earned by the trust or a percentage of market value of the trust. This type of arrangement may also include a “make-up” provision which allows higher payments in later years to “make up” for lesser payments in earlier years. (See Example 2.)

Both an annuity trust and a unitrust can help you increase the income you receive from an asset by “unlocking” its potential. You may also use this increased income to fund a wealth replacement trust, which allows you to replace the asset given away. (See Example 4.)


Duration of the trust
The trust agreement also establishes the duration of the trust. A trust agreement may call for the trust to only last for a designated number of years, up to 20 years; or the trust may last for the duration of the lives of all the beneficiaries.


Assets remaining in the trust
Finally, the trust agreement identifies the charitable organization(s) that will receive the assets remaining in the trust when the final beneficiary passes.

Example 1
Thelma Kauffman is 59 years old and owns stock that she inherited over 20 years ago from her grandparents. The stock is currently worth $70,000. It was worth $10,000 when she inherited it. Since receiving the stock, it has been paying a small two percent dividend, while its value has increased significantly.

Thelma would like to sell the stock, but she will owe capital gains tax on the $60,000 increase in value. She decides instead to use the stock to fund a charitable remainder annuity trust.

The trust will pay her six percent, or $4,200, annually for the remainder of her life. Her gift allows her to claim a $23,300 charitable deduction on her tax report this year. Additionally, because the trust sells the stock, she is able to avoid the capital gains tax that would have been due if she had sold the stock herself. At her passing, the balance of the assets in the trust will be available for EMM to use in its ministries.

Thelma was able to “unlock” the income potential of the stock she owned. She was also able to reduce her taxes and make a significant gift to the ministries of EMM.

Example 2
John and Janice Snider are 70 and 68 years old. They own an eight-acre parcel of land, which they bought ten years ago for $60,000. A recent appraisal of the land valued it at $120,000. The Sniders currently lease the land for $3,000 per year.

The Sniders plan to fund a charitable remainder unitrust to benefit EMM with a gift of the eight acres of land. Rather than a fixed flow of income, the agreement calls for a payment of the lesser of the actual income earned or seven percent of the value of the trust. The agreement also contains a “make-up” provision. Any year that the actual income exceeds seven percent, the distribution to the Sniders may include funds to “make up” for the years the distribution was less than seven percent.

The trustee continues to lease the land. Because the actual income of $3,000 is less than seven percent of the value of the land, the trustee will distribute $3,000 to the Sniders. When the trustee sells the land for its appraised value of $120,000, the proceeds will be reinvested. If the new investment provides a return higher than seven percent, the Sniders will receive a seven percent distribution plus an amount to “make up” for the years the distribution was less than seven percent.

The Sniders are able to claim a charitable deduction of $35,500 for their gift to the charitable remainder unitrust. They are also able to avoid the capital gains tax that would have been due if they had sold the land.

When the Sniders pass away, the balance of the trust will be distributed to EMM to help support its ministries.

Example 3
Maurice and Elena Foster are both 72 and plan to sell a rental property they own. They would like to use part of the proceeds to help cover the cost of college tuition for their only grandson. Because the property has increased in value from $75,000 to $200,000 over the time they have owned it, they would also like to use a portion of the proceeds as a gift to EMM.

After careful planning, the Fosters decide to give a 50 percent interest in the rental property to fund a charitable remainder unitrust. The trust will distribute funds to their grandson for four years, and then the balance of the trust will be forwarded to EMM.

The Fosters sign a deed that gives a 50 percent undivided interest in the property to the charitable remainder unitrust. The Fosters and the trust jointly sell the property for $200,000 with 50 percent, or $100,000, staying in the trust. The trust will pay eight percent of the value of the trust per year to their grandson for four years.

If the funds in the trust earn a seven percent return over the next four years, the Fosters’ grandson will receive a total of $31,500. At the end of four years, the remaining balance of $96,000 will be available to EMM for use in its ministries.

With this plan, the Fosters avoid the capital gains tax that would have been due on the portion of the property they gave to the trust. They also receive a $72,700 charitable deduction for their gift to the trust.

Example 4
Marvin and Lois Lichty are both 70 years old and plan to discontinue farming. A recent appraisal of their farm valued it at $800,000. Based on the income the Lichtys received from farming over the past decade, they currently receive a five percent return from the farm.

The Lichtys decide to place a 60 percent undivided interest in the farm in a charitable remainder unitrust. The trust will distribute 7.5 percent to the Lichtys for the remainder of their lives. At their passing, the balance will be distributed to EMM.

For this gift, the Lichtys will receive a charitable deduction of $138,000, which they can use to offset the capital gains tax due on the 40 percent they retained. The Lichtys use this tax savings, as well as the increased income from the charitable remainder unitrust, to purchase a life insurance policy for $480,000. The policy is held in a separate wealth replacement trust and will be paid to their four children when the Lichtys pass away.

This plan allows the Lichtys to “unlock” the farm’s income potential and avoid a portion of the capital gains tax. The tax savings and increased income from the trust allow them to purchase a life insurance policy that replaces their gift without reducing their income.

EMM’s ministries have been blessed by gifts of cash, stock, real estate, and investment properties to charitable remainder trusts. The donors also have appreciated the opportunity to satisfy their need for income while fulfilling their desire to expand God’s kingdom.

These are just a few examples of how you can use charitable remainder trusts to further God’s kingdom and help you meet your financial goals. If you have additional
questions about charitable remainder trusts, or if you would like to discuss in detail how a charitable remainder trust may be appropriate for your situation, please feel free to contact EMM’s director of financial resources at 717 898-2251.

Other financial planning resources available from Eastern Mennonite Missions: Charitable gift annuities; Gifts of stock; Gifts of real estate; and Gifts of retirement funds.

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Examples based on rates adopted on 5/12/03 by the American Council on Gift Annuities. Please contact Eastern Mennonite Missions’ director of financial resources for current rates. Examples are fictitious and do not refer to actual transactions.

Eastern Mennonite Missions is not engaged in rendering legal or tax advisory services. For legal or tax advice, please consult your own professional advisor.

Other ways to give

Bequests
A bequest is the simplest planned gift, given after your death through a directive in your will. It can be in the form of real estate, retirement funds, or stocks.


Charitable Gift annuities
A charitable gift annuity allows you to make a contribution to EMM in exchange for a fixed flow of income for the rest of your life. more >>


Life insurance and retirement plans
These assets offer various opportunities for benefiting your family and EMM’s family. The rules regarding gifts of retirement funds continue to change. To discuss the options available, contact Don Brubaker at 717 898-2251.