ESTABLISHING A CHARITABLE REMAINDER TRUST
What is a charitable remainder trust?
A charitable remainder trust is a vehicle for making a substantial gift to Michigan while:
- Retaining income from the gift during your lifetime for yourself and others, and
- Deriving certain tax benefits
What types of assets are commonly used to establish a charitable remainder trust?
Usually cash or readily marketable securities, including bonds. But real estate, works of art and other assets may be deemed acceptable by the University or other trustee. The marketability of the asset is a prime consideration in funding a charitable remainder trust.
Establishing a charitable remainder trust may be especially advantageous if you have assets, like low-dividend stocks, that have been generating little or no income.
What benefits do I receive from a charitable remainder trust?
- You receive the tax benefits of a charitable gift and avoid capital gains taxes on the initial transfer, and
- You receive a return on those assets (usually 5 – 6%) for the rest of your life and/or that of other beneficiaries. (Anyone can be named as beneficiary to your trust, but if the U-M is to be the trustee, the beneficiary must, in most cases, be over the age of 50 at the time the trust is established.)
How much of a charitable deduction will I get?
This depends on the size of your gift, the ages of income recipients, the size of the distribution recipients will be receiving and the federal mid-term rate, a number calculated monthly by the U.S. Treasury Department.
May I elect to have the University act as trustee for my charitable remainder trust benefiting Michigan?
Yes, you may choose to establish a charitable remainder trust with the Regents of the University as trustee. In order to establish a charitable remainder trust with the Regents as trustee, you must make a gift of $100,000 or more and you must name the University as the irrevocable beneficiary. The U-M Treasurer’s Office is responsible for the management of such trusts. To date, any administrative or investment expenses associated with these trusts have been assumed by the University although that policy may be amended in the future.
How often will I receive income from my trust? Will it be subject to taxes?
You will receive quarterly payments. The payments may be subject to taxes at varying rates, depending on the type of income generated.
What does the University do with the assets?
The University Treasurer's Office converts the cash, securities or other property into an appropriate investment portfolio using mutual funds. The aim of the University is to protect the purchasing power of the trust over time, even after income from the trust has been distributed to you and the effects of inflation have been accounted for.
How many charitable remainder trusts does the University manage?
As of July 31, 2004, the University manages 124 charitable remainder trusts with a market value of $53.5 million.
Is there more than one kind of charitable remainder trust?
There are two: the charitable remainder unitrust provides variable income; the charitable remainder annuity trust provides fixed income.
How can I judge which type of trust is best for me?
If it is your hope that distributions from the trust will at least keep pace with inflation, then you will want to choose the remainder unitrust. A unitrust, however, provides no guarantee that your income will increase over time. The income you receive could stay the same or even decrease, although the past record of University trust management suggests that it will increase.
If you prefer the reassurance of unchanging income, you would want to choose the charitable remainder annuity trust.
Do I need to retain legal counsel to establish a trust at the U-M?
Because a charitable trust is a binding legal agreement of some complexity, the University requires that you be advised by an attorney.
Do I assume all costs associated with the establishment of the trust?
Yes, fees associated with your attorney’s review and preparation of the trust document and other related advice from that person are your responsibility.
What are the steps involved in establishing a charitable remainder trust at the University of Michigan?
- The Office of Medical Development sends you sample calculations showing projected income and tax implications.
- At your request we send your attorney a specimen trust document.
- Upon your attorney's completion of this document, the University's legal counsel and Treasurer's Office review it.
- Upon approval of the document, the Office of Medical Development asks you to sign the trust and transfer the assets to the University.
Usually all of these steps can be completed within 1-2 months.
May I set up a charitable remainder trust naming the University as beneficiary and act as my own trustee or select a private or commercial fiduciary to serve as trustee?
Yes, you may. Such a trust may be set up with any amount of money and does not require naming an irrevocable beneficiary. The trust itself, however, may not be revoked under U.S. Treasury regulations.