Special gift plans can both confer personal advantages and be a way of supporting HMC’s aims and objectives.

Caveat: All examples here use rates in effect at the time of the gift. The results reported should be interpreted illustratively, and not precisely, for these rates change regularly. Request a current illustration.

Charitable Remainder Trust To Unlock Gain in Appreciated Assets
D.D., 64, had acquired a portfolio of individual stocks over a number of years. In 2000, he realized that his cost basis was about 40 percent of the market value of certain stocks and that, if sold, would create a significant capital gains tax obligation. He had been in conversations with HMC staff for some time about his estate plan and his goal to “give back” to HMC in some way. These thoughts converged in discussions that resulted in a charitable remainder trust funded by those appreciated stocks.

When D.D. created the trust of slightly more than $150,000, he generated a charitable income tax deduction of around $60,000 and secured a stream of payments for his lifetime at 5 percent of the market value of assets in the trust, undiminished by tax on the capital gain. Some of the future payments he will receive may be considered a distribution of that capital gain and taxed accordingly. But those taxes are assessed against future payments, not the original assets. So, 100 percent of his original gift could be at work on his behalf. Best of all, this gift will fund an endowed gift for the department and be named after one of his HMC professors and mentor, whose guidance was central to his academic career.

Convert Real Estate into Income for Life
W.H., 62, had invested in two rental homes during his working career, expecting that they were good investments for his retirement. Located near Silicon Valley, the property values exceeded his highest expectations. Purchased for around $50,000, each one exceeded $250,000 in value by 1998. Their growing value (and capital gains tax exposure) and the responsibility for managing tenants for many years stimulated his interest in the charitable remainder trust plans proposed to him by HMC staff.

His initial plan was to fund charitable remainder trusts about five years apart so that he could take advantage of his full charitable income tax deduction. (Deductions for gifts of real estate are limited to 30 percent of one’s adjusted gross income in a given year, but excess charitable deductions can be carried forward for an additional five years.) But, wary of the “bubble” that seemed to be building in the housing market and investments, he decided to complete one gift in 1998 and the second one in 2000. He successfully removed a major asset from his estate and the liability for major estate taxes, established a 6 percent return as a stream of income for his and his wife’s lifetimes, avoided any immediate capital gain liability and divested himself of the responsibilities of being a landlord. When the trusts terminate, he and his wife will have established a major endowment for HMC, well in excess of a half-million dollars.

Create a Source of Retirement Income   
J.S. decided he needed a supplemental retirement plan in addition to the defined contribution plans he had participated in with his employers. Contribution limits restricted him from quickly creating a “build-up.” So, he decided to establish a charitable trust with HMC with an initial contribution and a commitment to add a certain amount to it yearly. In addition, he elected a 5 percent payout, the lowest permitted, and concluded he would contribute his annual payments from the trust back into the trust principal. He receives a charitable deduction for each new contribution. At his full retirement, when he ceases making annual additions, he will have created a future income for the benefit of his wife and himself that supplements other retirement plans.

Provide Lifetime Support for Friends/Family at Reduced Gift Tax
J.P. was well aware of the benefits of charitable gift annuities. After all, he and his wife had established them with HMC and other educational institutions. But he also wished to provide some supplemental retirement income for his sister. So he established a $25,000 annuity that would pay her an income for her lifetime; based on her age at the time, it makes payments of 8.1 percent annually. Since this was a gift to someone other than his spouse, it was subject to gift tax. However, he used community property funds so that he and his wife could split the gift and use the $10,000 per year per donee exclusion rule. And since the gift was not $25,000, but the present value of the stream of income of 8.1 percent, they were able to make the gift with no adverse tax consequences. Of course, the most valued benefits were the assured income to his sister and the eventual use at HMC for addition to the endowed scholarship fund established by J.P and his wife.

Avoid Shrinking Your IRA by 80 Percent in Taxes at Your Death
P.O., parent ‘64, has notified HMC that it is named as a successor beneficiary on a commercial insurance annuity she has established. In so being named, HMC will directly receive the amount, rather than have it flow through her estate. Beneficiary designations are also important to individuals with IRAs and 401(k) plans because those plans, like the commercial annuity, have a double tax liability-income tax and estate tax. If those assets are within one’s estate at death and are subject to those taxes, as much as 80 percent of the asset value is “lost” to taxes. For that reason, the most tax efficient use of this type of asset is to name a charity as a successor beneficiary and fulfill philanthropic intentions with it, rather than some other type of property.

Charitable Trusts Unlock Appreciated Value in Real Estate Held by a Partnership
R.I., a Southern California businessman, and his wife began to support HMC in 1987 by funding scholarships for students in chemistry. He was one of two managing partners in a four-person limited partnership that built and leased facilities to the telephone company.

He wished to establish a charitable trust with his interest in a specific property owned by the partnership. He convinced his partners that all of them would benefit by setting up similar charitable trusts. The partnership interests in the real estate were distributed to each partner, who, in turn, contributed that share into separate charitable trusts. Because HMC served as trustee of all the trusts, it could facilitate the sale of the property, using the real estate services available from the Claremont University Consortium.

The result was a collection of four charitable remainder trusts, structured to meet the needs of each partner. Since the creation of the trusts in 1989, one of the donors has passed away and her funds have been put to use for the benefit of HMC. The remaining trusts continue to produce income for the donors or surviving family members. RI just enjoyed his 91st birthday, and he and his wife remain enthusiastic supporters of HMC and its special type of education.