Financial Planning for February 2012

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Convert highly appreciated assets into retirement income

For those who are fortunate enough to be in possession of a highly appreciated asset – whether as a result of hard work, luck or an inheritance –talking to a tax and financial expert to discuss tax and financial planning options is of utmost importance. Highly appreciated assets are exactly what they sound like: assets that have significantly appreciated. These might include, but are not limited to, a successful business, real estate or a stock portfolio.

Baby boomers who are nearing retirement and need additional income but want to limit their tax liability should consider placing their highly appreciated assets into a charitable remainder trust or setting up a charitable gift annuity. This type of trust or gift annuity will pay you or your beneficiary an income for life or for a specified number of years. You and your estate will also receive substantial tax benefits. Upon your death or that of your beneficiary, the remainder of the donated asset goes to the chosen charity.

Charitable Remainder Trusts

There are two types of charitable remainder trusts: the charitable remainder unitrust and the charitable remainder annuity trust. The main difference between these two trusts is found in the way the payout is calculated. With a unitrust, the income is variable; with an annuity trust, the income is fixed.

  • Charitable Remainder Unitrust

If you expect your donated asset’s value to keep pace with or exceed the inflation rate, the charitable remainder unitrust is an option to discuss with your financial advisor. The payout is based on an agreed upon percentage (not less than 5 percent) of the asset, meaning that your income will vary as the value of the asset rises or falls. One risk, of course, is that the asset will depreciate, leaving you with a reduced income. An advantage to the unitrust is the ability to add additional funds.

  • Charitable Remainder Annuity Trust

The charitable remainder annuity trust pays a fixed annual income for life or for a specified term. The annual payout is based on a percentage of the asset value at the time the trust is created; or it may simply be a set, predetermined amount. The advantage to the annuity trust is that even if the asset’s value declines, the income stays the same. You should note, however, that although the payout amount is fixed, if the asset’s value drops to zero, the income will stop. You cannot add additional funds to an annuity trust, but you can establish new trusts.

The charitable gift annuity differs from the charitable remainder annuity trust in that this type of arrangement is simply a contractual agreement between you and the charity, instead of being a legal trust. In exchange for the donation of your highly appreciated asset, the charity agrees to provide you or a designated beneficiary with a fixed annual income for life. Regardless of the asset’s future value, you are guaranteed a fixed amount of income for the full term of the agreement. Charitable gift annuities might not be offered in your state, so check with your financial advisor for availability.
Charitable annuity trusts and charitable gift annuities are usually offered by major charitable institutions due to the financial risk assumed by the organization. Due to the recent market volatility, the fixed-income aspects of charitable remainder annuity trusts and charitable gift annuities have become more popular than the variable income offered by charitable remainder unitrusts.

Talk to an Advisor About Other Strategies

As with all important financial, estate planning and tax-related decisions, you should always consult with a trusted advisor before establishing a charitable trust or gift annuity. An expert can identify other strategies, such as using part of your tax savings to purchase life insurance, which can further limit your tax liability and benefit your heirs.


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