A charitable remainder annuity trust pays income based on a percentage of the initial value of the trust and the payout amount never changes. As a result, an annuity trust provides a fixed dollar amount of income each year regardless of any fluctuations in the value of the trust assets. Payments of the annual annuity are made each year regardless of the income earned by the trust, and they are backed by the total amount of the assets held by the trust.
Miss Jones, age 80, owns securities worth $100,000, which she bought many years ago for $10,000 and which pay a total cash dividend of $2,000 (2 percent). She is in the 35 percent income tax bracket and the 15 percent bracket for capital gains taxes. She would like a greater current return on her securities, but has hesitated to sell the stock because of the $13,500 in capital gains tax that would be due.
By transferring her shares to a charitable remainder annuity trust with a 6 percent payout, she increases her current income to $6,000 and avoids paying any immediate federal capital gains tax, even if the trust should subsequently sell the securities. In addition, she receives a charitable income tax deduction of almost $63,200 (based on an IRS discount rate of 5.8 percent).
Through the charitable remainder annuity trust gift, Miss Jones is able to support programs at Whitman that she values, while also providing herself higher income for her lifetime, at an effective cost of just over $64,400.