Life Income Plans
You can make a substantial gift to benefit the Indiana University School of Medicine while still earning income from the donated assets. These life income plans are some of the most flexible philanthropic options available. They allow you to provide income for yourself, your heirs or both; avoid significant capital gains and estate taxes; and satisfy your wish to support the IU School of Medicine.
This is how it works:
You fund the trust with an irrevocable gift to the IU Foundation to benefit the Indiana University School of Medicine. (The gift must be irrevocable to qualify for the federal charitable deduction.) The Foundation invests the gift, and you or your designee receive income for as long as you choose – for a definite term of not more than 20 years or for the rest of your life. At the end of that time, the remaining principal benefits the School of Medicine in whatever way you specify.
You may establish a trust using assets such as real estate, stock or cash. Funding it with appreciated long-term property enables you to protect your profit or reinvest for a higher yield while avoiding capital gains taxes. You thereby maximize the value and the benefit of the property, both as income and as a gift.
There are two basic types of life income trusts: annuity trusts and unitrusts. The annuity trust pays a fixed dollar amount, while the unitrust pays a fixed percentage. With the annuity trust, your income will be the same each year, regardless of the value of the trust. With the unitrust, your income will vary as the value of the trust fluctuates.
A charitable remainder annuity trust pays a fixed amount to you or your beneficiaries at least once a year. (The amount paid to you is at least 5 percent of the fair-market value of the trust assets when the trust is established.) The payout is determined when you set up the trust, based on such factors as your age, the number of beneficiaries, your desired income and the length of the trust term. If the trust earns more income than the agreed amount, the additional earnings are reinvested. If the earnings are less, withdrawals from the trust’s principal make up the difference. Once the annuity trust is created, you may not make additional contributions to it.
You will receive an income tax deduction for the value of the charitable remainder interest in the trust at the time you establish it (calculated based on your age). In addition, you avoid or postpone capital gains over your projected life expectancy rather than realizing them all at once at the time of sale. Because the assets are effectively removed from your estate, you also avoid estate taxes.
A charitable remainder unitrust differs from an annuity trust because it pays a fixed percentage – at least 5 percent – of the fair-market value of the trust’s assets each year, rather than a fixed sum. That means the income will fluctuate from year to year as the trust’s value fluctuates. As the long-term market pattern is usually one of growth, you can generally expect payments to increase over time. In this way a unitrust can be an effective hedge against inflation. You may make additional contributions to a unitrust.
Your charitable deduction depends on the fair-market value of the initial assets you transfer, the payout percentage you choose, the number and ages of beneficiaries, and other such factors. As with an annuity trust, you may effectively remove the funding assets from your estate and avoid or postpone capital gains taxes.
Charitable Gift Annuities
One of the most common and popular ways to make a planned gift is with a charitable gift annuity. It is a simple contract between you and the IU Foundation. In exchange for an irrevocable gift, the Foundation agrees to pay one or two annuitants a fixed dollar amount each year for life. The amount is based on life expectancy: The older you are at the time of the gift, the greater the amount can be. The payments are guaranteed by the general resources of the IU Foundation.
Charitable gift annuities can be funded with cash, real estate or appreciated securities. You receive a tax deduction based on your age, the payout rate and the federal discount rate. If you use an appreciated asset, a portion of each payout will be capital gain, which is therefore spread out over your lifetime. Likewise, a part of each payment would be a tax-free return of principal, increasing the after-tax value of each payment. And because you have effectively removed the assets from your estate, you avoid estate taxes.
A similar type of annuity is the deferred charitable gift annuity. The difference is that the IU Foundation waits to begin your fixed payout until some specified point in the future (at least one year).
A deferred charitable gift annuity can be an excellent way to supplement your retirement income. The Foundation receives the gift today and invests it for years. You receive a current tax deduction, but you don’t receive the payments until you retire, when you may be in a lower income tax bracket.
With either a charitable gift annuity or a deferred charitable gift annuity, proceeds become available to the Indiana University School of Medicine at the time of your death to support the program or speciality you designated.