California State University San Bernardino Palm Desert Campus

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Life Income Gifts

Life income gifts are an old and honored form of support for charities donors wish to support. In each of the following scenarios described below, the donor transfers his/her property to the charity—in this case the Palm Desert Campus of California State University, San Bernardino—and the University agrees to pay an income to the donor and/or another designated beneficiary for life. In some situations, a term of not more than 20 years would be possible. On the death of the income beneficiary or the expiration of the term, the balance of the gift is released to the University to be used for the educational purposes designated by the donor.

Types:

Charitable Remainder Unitrust
A unitrust may be established to benefit both the donor and the university by transferring assets irrevocably to California State University, San Bernardino. The income paid to the beneficiary will vary each year and depends on the type of unitrust created:

A “percentage” unitrust pays the income beneficiary a fixed percentage of the trust’s annual value. The donor sets the payout percentage in the trust document; for the gift to qualify under federal tax law, the payout percentage must be at least 5% and no more than 50%. This amount is paid each year first from income and then from principal. In years when the trust assets appreciate, the distribution will increase; when asset values decline, distributions are lower.
A “net income” unitrust pays to the beneficiary a fixed percentage of the trust’s annual value or the actual net income earned by the trust during the year, whichever is less. If the fund income is lower than the fixed percentage for one or more years and is higher in a later year, the excess income may be paid to the donor at the later time up to the amount of the past deficiencies.
A “flip” trust begins as a net income unitrust and flips to a percentage unitrust at a predetermined time. (for example, when the trustee sells the initial trust property or when the income beneficiary reaches a certain age.) This allows a donor to give real estate or other illiquid assests to the unitrust and then to flip the trust once the assests have been sold, to a percentage unitrust that may be able to pay out more income over time.

If either a percentage or net income unitrust earns more than it is required to distribute in any year, the excess is retained in the trust . Payments are usually made quarterly.

Charitable Remainder Annuity Trust
An annuity trust is similar to a unitrust in most respects, except that the donor will received a fixed dollar amount that does not fluctuate with the annual value of the trust. The donor sets the amount, which must be at least 5% and not more than 50% of the value of the property at the time it is transferred into trust. Payments continue in the same amount unless the entire trust is exhausted, at which time payments would cease.

For example, if a donor created a 5% annuity trust with stock worth $500,000, each year he/she would receive $25,000. This distribution will not change over time and, if the trust assets do not produce enough income to make the payment, the donor would receive a portion of the principal.

Charitable gift Annuities
A gift annuity is a simple contract by which the CSUSB Palm Desert Campus, in exchange for a gift of money or property, promises to pay a fixed amount each year to a designated beneficiary for life. Such payments become a general obligation of the institution.

Avoidance of Capital Gains Tax
Charitable remainder annuity trusts and unitrusts are tax-exempt. As a result, if the trustee sells the property, there will be no tax on the capital gain. The full fair market value of the gifted property, minus the cost of the sale, will be invested to produce an income for the beneficiary.

Charitable Lead Trusts
It may be advantageous for a donor to create a trust with an income interest payable to the CSUSB Palm Desert Campus for a term of years. The donor may direct that the trust property be returned to the donor or distributed to another person at the end of the trust period.


This method is particularly suitable if the donor:

a. Wants to gift the Palm Desert Campus more than the donor can
currently deduct;

b. Will have unusually high income in one year, and much lower income
for a period thereafter;

c. Is willing to part with income-producing property for a time, but wants
the property to revert to the donor or the donor’s family; or

d. Can afford to dispense with part of current income and wants to make
gifts to his or her children or others in a way that can save gift and
estate taxes.

Typically, charitable lead trusts are more attractive when the IRS discount rate, which can change monthly, is low. There are several varieties of charitable lead trusts. Each type achieves different tax objectives for the donor.

With a Traditional Lead Trust a donor conveys property irrevocably to a trustee, such as the CSUSB Palm Desert Campus, and provides that an income interest be paid to the institution during the term of the trust. At the end of that term, the trust property’s income is paid to family members other than the donor and the donor’s spouse.

With a “Grantor” Lead Trust, the assets are returned to the donor when the trust ends and the donor will obtain an immediate income tax charitable deduction for the computed present value of the university’s income interest.

A Testamentary Charitable Lead Trust can be used to make a charitable bequest of an income interest in property, with the trust property passing to the donor’s heirs, after a period of time.

Bequests
Bequests to the Palm Desert Campus of California State University, San Bernardino, whatever the amount, are entirely free from estate and other death taxes. The savings can be substantial.