A Guide for Gifts & Bequests for Loma Linda Contributors
Ways of Giving: Planned Gifts
- Bequests
- Charitable Remainder Testamentary Trusts Established through Bequests
- Life Payment Plans: Charitable Remainder Trusts and Other Income-Producing Gifts
- The Charitable Remainder Annuity Trust: Plan 1
- The Charitable Remainder Unitrust: Plan 2
- The Charitable Lead Trust
Deferred gifts to Loma Linda University, Loma Linda University Medical Center, or Loma Linda University Children's Hospital through bequests or life-income trusts can offer many advantages for contributors interested in providing future financial support to any one or all of these institutions. Our planned giving officers will be pleased to work with you, the donor, and your financial or legal advisors to help you fulfill your long-term charitable and financial goals.
Bequests
Bequests continue to be very important in assuring Loma Linda's position in teaching, research and service. We encourage our donors to include Loma Linda University, the Medical Center or the Children's Hospital in their wills.The Importance of a Will
Seven out of ten persons do not have a valid will. Many have postponed what appears to be an unpleasant task. Others erroneously assume their assets are not large enough to justify a will. Having a will as part of your estate plan provides many benefits:
- You can distribute your property as you wish. If you have no will, your property will be distributed according to the laws of the state where you live. These laws are inflexible and may not take care of the people and institutions you wish to remember. The only way to ensure your wishes are followed is to have a carefully drawn will.
- You have flexibility in carrying out your wishes. You may have a personal treasure that you'd like someone to receive. Only a will can make that wish a certainty. A will permits the use of trusts to aid in the financial affairs of your survivors. It also permits you to select the individual who is to administer your estate. The court appoints an administrator for those who die intestate (without a will). In your will you may grant broader powers of administration to your executor than a court-appointed administrator would have.
- You can carry out your wishes most economically. For example, in your will you may direct your executor to serve without bond. Without a will a financial bond is required before a court-appointed administrator can serve, the cost of which comes out of your estate.
- You can provide for your children. In your will you may nominate a guardian for your children who are minors. Without a will, the court makes this appointment. In a will you also can create a trust for your children, giving the trustee you name broad powers to manage the assets of the trust for your children until they reach an age you select, at which time the property may be turned over to them.
Who prepares a will? Your lawyer should prepare your will. It is a legal instrument custom-made for your situation, and it is inadvisable for you to complete a blank will form or to draw your own will. A lawyer will help assure that your will is properly drawn, signed and witnessed.
Steps in Drawing Your Will
Step 1. Collect the necessary information for your lawyer.
To prepare your will, your lawyer will need to know the full names, birthdays, addresses and Social Security numbers of your closest relatives. Also, he or she will need detailed listings of your real estate and personal property, including retirement plan benefits, insurance, annuity contracts, property descriptions, form of ownership (outright, tenant in common, joint tenant), and a list of your debts and amounts owed to you. Also provide your lawyer with a general outline of how you wish your property--including books, jewelry and other items of sentimental value--to be distributed.
Step 2. Read the document.
After your lawyer understands your wishes and has prepared a draft of your will and explained it to you, you will have an opportunity to make any changes you feel are needed before signature.
Step 3. Sign your will.
There are required formalities in signing a will and having it witnessed. Your lawyer will supervise this to comply with the laws of your state. This is a simple but a vitally important step in making sure your wishes are carried out.
Step 4. Keep your will in a safe place.
To make it easier to carry out your wishes, place your will and the names and addresses of your heirs in a safe place, such as a safety deposit box. Make sure your family knows where your will is located.
What Laws Affect Your Property?
The laws of the state in which you reside govern the disposition of your personal property. Real property (such as land and buildings) is governed by the laws of the state in which the property is located. If you change your place of residence from one state to another, you should see a local attorney about possible changes needed in your will.
What is Controlled by a Will?
All real and personal property owned solely by you is controlled by your will. Life insurance payable to a named beneficiary is an exception: You have already decided on its disposition by naming a beneficiary, so you cannot name someone else in your will. The same is true of United States Savings Bonds, bank accounts, certificates of deposit or another property jointly owned or payable to someone else on your death. It is important to remember that joint ownership of property is not a substitute for a will. Without a will, the estate may lose valuable tax advantages.
Bequests to Loma Linda University, Medical Center, and Children's Hospital
A will can be a means to making a substantial gift to Loma Linda University, the Medical Center or Children's Hospital without diminishing the assets available to contributors during their lifetimes. Important estate tax savings can result from such contributions, since bequests to Loma Linda may be deducted entirely from the taxable estate in determining estate taxes. Often such bequests will place the estate in a lower tax bracket.
Although Loma Linda University has received large bequests, such gifts do not need to be large to have a worthwhile impact. For instance, a $20,000 bequest will provide (at a 5.5 percent yield, with any excess income returned to the principal of the fund to encourage further growth and keep pace with inflation) a perpetual gift of $1,100 per year to Loma Linda in the name of the contributor.
As mentioned, the drafting of your will is a job for your attorney. Counsel from our Foundation, legal or advancement staff is available upon request on the appropriate terms and conditions for a gift, so that both your wishes and Loma Linda's needs are best satisfied. Your bequest might take one of the following forms:
Specific Bequests (Cash and Non-Cash)
Of the numerous ways to give through a will, a bequest of a fixed amount of dollars or specific property is perhaps the simplest. It is the most logical form when the individual has in mind a particular provision for a benefitting entity at Loma Linda. A bequest of property to the University, Medical Center, or Children's Hospital may range from securities to works of art, from rare books to real estate or even patent rights.
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Charitable Remainder Testamentary Trusts Established through Bequests
For individuals who wish to make a substantial bequest to an entity at Loma Linda while providing an income for their families or others during their lifetimes, a charitable remainder testamentary trust provides a way to accomplish this. At the time of the testator's death, a designated portion--perhaps all--of the estate is placed in trust, with a specified annual amount being paid to the named beneficiaries during their lifetimes. The principal of the trust passes to the named Loma Linda entity upon the death of the last surviving beneficiary.Although the value of each individual beneficiary's interest is included in the taxable estate, the estimated value of Loma Linda's future right to the principal (the charitable remainder interest) may be deducted from the total estate as a charitable deduction before the federal estate tax is computed.
The charitable remainder testamentary trust arrangement also helps assure skilled financial management for the beneficiary(ies) receiving life payments. A bank or other financial institution most often serves as trustee, but in some cases the Loma Linda University Foundation also can serve in this capacity.
Provisions for the charitable remainder testamentary trust are made in the testator's will, and the trust does not become operative and binding until the testator's death.
IMPORTANT: The Internal Revenue Code provides that for a charitable remainder testamentary trust to qualify for the estate tax charitable deduction, the specified payments to the individual beneficiaries must conform to annuity trust or unitrust regulations. The essential elements of such trusts are outlined in the following section on life payment trusts. Staff members at the Loma Linda University Foundation or Loma Linda's planned giving staff are ready to answer your questions regarding testamentary trusts and can provide you and/or your attorney with sample trust forms for either testamentary trusts or those funded during a donor's lifetime, as described in the following section.
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Life Payment Plans: Charitable Remainder Trusts and Other Income-Producing Gifts
A person may wish to make a substantial lifetime gift to the University, Medical Center or Children's Hospital but not give up the income that the gift property (money, securities, real or personal property) is producing. There are a number of plans that can solve this problem and even increase the contributor's spendable income and the income of a surviving beneficiary. Such charitable remainder gifts can provide several economic advantages (some of which are also described in "Real Estate as Charitable Gifts").
When long-term property that has increased in value is transferred into a charitable remainder trust, the capital gains tax on appreciation is generally eliminated.* Further, the trustee can subsequently sell the gift property to reinvest the proceeds for greater diversification and/or higher yields without the trust being liable for capital gains taxes.
*NOTE: Use of mortgaged property to establish life payment trusts is subject to special rules and is discouraged as a way of making a gift.
Through this double protection, the full appreciated value of the gift (minus any selling costs) continues to earn income for the life payment beneficiaries of the trust, undiminished by taxation.
Also, an income tax deduction is generated for the contributor who establishes a life payment gift in trust. The charitable deduction is less than the full value of the property transferred. This takes into account that the charity must wait to use the funds for its benefit and that the contributor or other income beneficiaries will receive the income in the meantime.
The percentage of the transfer value allowed as a current income tax deduction depends on the size of the annual payments, the number of life payment beneficiaries, their age (i.e., life expectancy), and the type and terms of the trust arrangement. The income tax deduction is determined by reference to government tables. Below are examples of the approximate deductions allowed. There are some minor differences among the factors used for the charitable remainder unitrust and the annuity trust, and slight adjustments are required for difference payment schedules (annual, semi-annual or quarterly payments).
EXAMPLE (using the table): If a 60-year-old single man established a $100,000, six percent charitable remainder annuity trust, with only himself as the life payment beneficiary, he would receive a $52,000 income tax deduction. He may take this deduction in the year the gift is made (up to 30 percent of his adjusted gross income) and for a carry-over period of up to five more tax years should he not be able to absorb the total deduction in any given year.
The higher the payout rate the lower the allowable charitable deduction. For example, a seven percent payout instead of the six percent assumed in the table would reduce the deduction for a 60-year-old contributor/beneficiary from the $52,000 to about $44,000.
The savings realized from the income tax deduction generated by establishing a charitable remainder trust can be invested to produce added income. In other words, the tax savings reduce the net cost of the gift and thereby increase the effective rate of return to the individual beneficiaries.
For example, if a 70-year-old contributor/beneficiary in the 28 percent income tax bracket establishes a seven percent annuity trust, her actual annual return will be more than 8.2 percent of the value, taking income tax savings into account.
The contributor's taxable estate is reduced, either by a charitable deduction for the full value of the trust or by a partial deduction if there is a surviving individual beneficiary of the trust.
NOTE: Creating a life payment interest for another person may result in a gift tax, although in most cases the gift tax liability can be eliminated either by the gift tax marital deduction or by the contributor reserving the right, exercisable by will, to revoke a surviving beneficiary's interest.
The provision for professional management of assets is an important advantage in many cases. An individual or other fiduciary, such as the trust department of a bank, most often is selected by the contributor as a trustee of a charitable remainder trust. The Loma Linda University Foundation may serve, if requested, as trustee of a charitable remainder trust of which it is the sole remainderman (charitable beneficiary). Generally, the Foundation will serve if there are no more than two life payment beneficiaries, the youngest of whom is at least 50 years old. Life payment gifts can be exceptionally advantageous for older contributors when funded with property that is yielding a relatively low return compared to its appreciated market value. The following brief description of some of the methods available can help to determine if one type of trust or another should be investigated. In all cases, care must be exercised to assure that a charitable remainder gift will qualify in every respect for favorable tax treatment.
Opened in early 1995, the Drayson Center (pictured) was largely made possible through several major contributions by the Drayson and Lindgren families.
Approximate Charitable Income Tax Deductions
(for a unitrust or annuity trust paying out six percent per year)
| Beneficiary(ies) age | 50 | 60 | 70 | 80 | |
|---|---|---|---|---|---|
| One-Life Payment Interest Annuity Trust: Unitrust | 46% | 51.9% | 60.1% | 70.6% | |
| 25% | 36.7% | 50.7% | 65.9% | ||
| Two-Life Payment Interest Annuity Trust: Unitrust | 41.2% | 45.1% | 51.9% | 62.2% | |
| 15.4% | 25.1% | 38.5% | 55.0% |
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The Charitable Remainder Annuity Trust: Plan 1
The charitable remainder annuity trust pays the named beneficiary or beneficiaries a fixed specified sum each year which cannot be less than five percent of the initial value of the gift placed in the trust. Funds cannot be added later to an annuity trust, but other similar trusts can be established.Payments to the beneficiary(ies) are considered to be first made out of ordinary income earned by the trust and then, if needed, out of realized capital gains, income from tax-exempt securities or from the principal of the trust, in that order.
EXAMPLE: Mr. Smith, age 62, transfers $100,000 in appreciated securities, for which he paid $60,000, to establish a charitable remainder annuity trust and elects to receive $6,000 annual payments (six percent) for his life and for the life of his 60-year-old wife. By doing so he eliminates the capital gains tax on the $40,000 of appreciation and also realizes a charitable income tax deduction of approximately $45,621. The beneficiaries will receive $6,000 per year, regardless of fluctuations in the value of the trust assets or actual income realized by the trust.
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The Charitable Remainder Unitrust: Plan 2
The unitrust is a charitable remainder trust which provides variable payments to the life payment beneficiaries. In the regular or straight unitrust the annual payments are based upon a percentage (at least five percent) where the fair market value of the assets in trust are determined annually. If desired, funds may be added to a unitrust by subsequent gifts. Any of the three types of unitrusts described in this section may be funded initially with real property as well as by gifts of cash or marketable securities.EXAMPLE: Miss Harrison, age 69, transfers $60,000 in stock to fund a unitrust and elects a six percent payout rate. Her stock has a cost basis of $20,000. Not only does she eliminate capital gains tax on the $40,000 of appreciation, but she also realizes a charitable income tax deduction of approximately $29,514. Her first-year unitrust payments will total $3,600, and thereafter they will be six percent of the value of the trust assets determined each year.
If the trust assets grow at a rate of five percent per year, within 10 years her income will increase to $5,400. (However, in years where the market value of the trust assets decreases, the payments to the income beneficiaries also will decrease for the ensuing year.)
A second variation of the unitrust is the net income unitrust. This form of unitrust pays out the stated percentage of the assets or the trust's actual income, whichever is less. The net income unitrust is appropriate for a contributor whose primary interest is in the conservation and growth of the charitable remainder.
The net income plus make-up unitrust is another variation. It is similar to the net income unitrust except that payments in any subsequent year may exceed the set payout rate to make up any accumulated deficiencies, provided the higher earnings are available in the subsequent year to meet the percentage payout.
The net income plus make-up unitrust can be advantageous for a contributor in high income years, who might be interested initially in growth of the principal and later in higher income from the asset values in trust. It also is useful as a mechanism for accomplishing gifts of appreciated land by a contributor seeking diversification and higher earnings after the property is sold by the trustee for reinvestment.
IMPORTANT: The Internal Revenue Code provides that for a charitable remainder trust to qualify for the estate tax or income tax charitable deduction, the specified annual payments to the beneficiaries must conform to the annuity trust or unitrust regulations. The essential elements of such trusts are outlined in this section.
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The Charitable Lead Trust
The charitable lead trust, like a life payment trust, is a split-interest trust, but the interests are reversed. It is the charity that receives annual payments from the trust for a period of years specified by the trust's grantor. At the termination of the trust, its assets pass to one or more individuals (quite often but not always the grantor) who have the remainder interest. The name given this type of trust is derived from the fact that the charitable interest comes first--or leads.Among the several variations of charitable lead trusts, one of the most useful in estate planning is the type under which the assets pass at a later date to other individuals instead of reverting to the grantor.
A primary application of the charitable lead trust is to enable relatively wealthy individuals to reduce the transfer tax burden of transfers of property to family members. For example, if a father gives his son $200,000 outright, the entire amount (except for the $10,000 annual exclusion) will be reported as a taxable gift and then added back into the father's estate tax base to compute the graduated estate tax rate.
But let's suppose the father places the $200,000 in a charitable lead trust with annual payments to a qualified charity for a stated period. After that period ends, the principal is distributed to his son. In this case, only a portion of the principal becomes a taxable gift and is consequently, added back into his estate. The income from the trust is not taxed to the contributor, nor does he receive an income tax charitable deduction for the annual payments to the charity.
EXAMPLE: Assume that Mr. Jackson has an estate in excess of $1 million and that his family consists of his wife and two children, ages 16 and 18. He holds stock in XYZ Corporation which is likely to double in value during the next decade. He wants his children to benefit form that future appreciation without losing an inordinate amount to federal estate taxes.
Thus, Mr. Jackson places $200,000 worth of stock in a charitable lead trust, stipulating that for a period of 12 years an annuity equivalent to 6 percent of the initial market value of the trust will be paid to a benefitting institution at Loma Linda (University, Medical Center, or Children's Hospital). At the end of 12 years the trust principal is to be distributed to his two children, who then will be 28 and 30 respectively.
At the time the trust is established Mr. Jackson will report a future taxable gift to his children of approximately $100,000. For purposes of determining the tax rate that will be applicable to his estate, only this taxable gift portion will be added back. If he had retained the stock and bequeathed it to his children and had it appreciated as anticipated, $400,000 would be included in his estate which, at a 45 percent federal estate tax rate, would generate an estate tax of about $180,000.
With the charitable lead trust, however, the approximate estate tax triggered by the gift of stock is $62,000, resulting in a savings of $118,000. There is a loss of income for a 12-year period. Assuming a 28 percent tax bracket, this amounts to $103,680, which is far less than the estate tax saved.
In Summary, Mr. Jackson:
- Reduced his estate tax,
- Gave his children stock that has appreciated to $400,000,
- Delayed asset distribution to his children until they are adults and more able to properly manage these assets...
NOTE: Questions on the specifics of these kinds of trusts, their tax benefits and consequences, and the ways that the Loma Linda University Foundation could act as a trustee can be answered by our planned giving officers.
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