Giving and Getting

Grandparents can now donate to UJA-Federation and in return the charity will help fund their grandchild’s college education.

A recent change in Internal Revenue Service regulations has created a "flip unitrust," which unlike other trusts providing donors with immediate income for the rest of their lives, allows donors to defer income from their gifts.

"The longer you defer it, the more the principal will grow," said Chuck Goldman, UJA-Federation’s group vice president for planned giving and endowment. "And the amount you receive annually changes with the size of the principal.

"This is good for individuals who may want to create a future stream of income for a child. Grandparents can create a trust that does not generate income until the child is 18, and it can then be used to help pay for college."

Donors, however, still get an immediate tax deduction, Goldman noted.

The flip unitrust is among three types of vehicles UJA-Federation will establish that generate income for donors for the rest of their lives. UJA-Federation is stressing these options (in addition to an outright gift of money or appreciated stock) as its 1999 fund-raising campaign comes to an end June 30.

A second vehicle is the charitable remainder trust, in which donors receive income from their gifts until their death. The principal (a minimum of $25,000) then goes to the charity they designated when they established the trust.

"A lot of people have done well in the stock market and they want to do something charitable but still retain something for themselves," said Goldman. "So if they give away stock worth $25,000, they can still get an annual income of about 7 percent [of the principal]."

Goldman explained that the amount of the annual payout received by the donor generally depends on the current interest rate and the donor’s age at the time the trust was established. For instance, a donor who is 53 when creating a trust with a 7 percent annual return from a $25,000 gift is allowed a $5,800 tax deduction the year of the donation; one who is 75 gets to take a $13,000 deduction.

There is flexibility in naming which charities are to receive the donation.

"We [at UJA-Federation] allow up to 25 percent of the trust principal to go to other charities, such as Planned Parenthood," said Goldman.

The trust from the start must pay at least 5 percent of the principal annually.

The third type of income-providing donation is the differed charitable gift annuity. The annual payout begins at 65 and is determined by the donor’s age at the time of the gift.

"If people at the age of 25 open a differed charitable gift annuity with $10,000, they will receive a rate of return of 54.1 percent [of the $10,000] annually for the rest of their lives," said Goldman. "That $10,000 will be growing over the years."

For those who make the same contribution at the age of 45, the rate of return would be 21.2 percent: $2,120 annually until their deaths.

"One of the ways we think this could be a valuable program for young people is that it would be supplemental income for them," said Goldman. "The tax deduction on the $10,000 gift for a 45-year-old is about $4,500, so the effective rate of return is actually higher than 21.2 percent. If you were in a 40 percent tax bracket, a $4,500 deduction would actually save you $1,800 that you would have had to pay in taxes. If you subtract that $1,800 from the $10,000, the gift is really costing you only $8,200."

Those making the same gift at the age of 55 would realize a rate of return of 12.3 percent of the principal. The minimum donation is $2,500.

The same gift made by those 65 and older is known as a charitable gift annuity, Goldman noted. And he pointed out that the gift could be structured to allow two people to receive the income if both are 65 and above.

"You would get one payment but if one dies, the check would continue coming to the other person," he said.

Goldman noted that UJA-Federation also receives bequeaths and that he would like to meet with those whose bequest is going to be in excess of $25,000.

"There are opportunities for people to endow a specific project," he said. "An endowment fund is a way to purchase a little piece of immortality."