Charitable Remainder Annuity Trusts

> You're considering a lifetime gift in partnership with the UT Health Science Center
> Your planning objective is increased income
> Your preference is fixed income payments
> You want to retain some flexibility in the management of your gift

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At the School of Health Information

Sciences, Dr. Jaijie Zhang, associate

dean for research, and Interim

Dean Dr. Jack W. Smith study how best

to collect, transmit, store, and analyze

electronic health data in an effort to

assist clinicians and administrators

everywhere with their decision-making.

The charitable remainder annuity trust is an individually managed trust that combines regular, predictable income with some flexibility in management and investment.

The annuity trust pays its beneficiaries -- you, your spouse, family members, or other individuals – fixed-dollar income or a fixed percentage of the initial value of the assets that funded the trust.
Income from your annuity trust can be paid to you and your other beneficiaries for lifetime or for a term of up to 20 years.
No upfront capital gains tax is payable if you fund your annuity trust with appreciated property. So, you can contribute appreciated but low-yielding assets and put the entire value of your gift to work generating higher income for you.
Besides avoiding capital gains tax, you also receive a charitable income tax deduction when you create an annuity trust. Your deduction will be based on the full fair market value of the assets you contributed, reduced by the present value of the income interest you retained.
The charitable income tax deduction for an annuity trust is usually higher than that for a unitrust, because the unitrust is likely to pay out more income to the beneficiaries over time. The Office of Gift and Estate Planning will happily provide deduction comparisons for you and your advisors.
When your annuity trust terminates -- at the death of the last beneficiary or at the end of the trust term -- the remaining balance will be available for the use you designated when you created the trust.
Annuity trusts can't be flexible in their payout as unitrusts can. Therefore they can't accept gifts of illiquid assets, invest solely for growth, or pay out net income only.
The Health Science Center can serve as the trustee of your annuity trust, or you or a financial advisor or institution can serve. We do not charge a fee for our services but do ask a minimum gift of $50,000 to establish an annuity trust which we will trustee.

Planning Tip -- Capture the Benefits of High-Yield Tax-Frees

<empty> Are you concerned about declining yields in your portfolio of tax-free bonds? You can capture high interest rates and still make a gift to the Health Science Center by placing one or more of your older bonds into an annuity trust. The trust will hold the bonds, and pass their tax-free income through to you and your beneficiaries. In addition, you will receive a charitable income tax deduction based on the market value of the bonds you donated, minus the present value of the income interest you retained.

The effect is to make one asset perform two tasks for you -- pay you high tax-free income and also generate a charitable deduction. Meanwhile, your gift has increased the Health Science Center's long-term financial strength.

The Office of Gift and Estate Planning can give you and your advisors more information on this annuity trust planning option.

Your portfolio contains fixed-income securities and many tax-free bonds. As your gift to the UT Health Science Center, you decide to place $250,000 of your tax-free bonds into an annuity trust paying income to you and your husband. What are your benefits?
Donors	Husband and Wife, 70 and 68
Asset contributes	Tax-free bonds
Amount contributed	Fair market value $250,000
Cost basis	$125,000
Income rate	5%
Annual income	$12,500 (tax-free)^[1]
Charitable deduction	$107,924
Tax savings	@ 35% rate: $37,773
^[1]If the bonds mature or are called, the annuity trust may incur capital gains tax, which will be reflected in your income payments.

How Do You Create an Annuity Trust?

Setting up a charitable remainder annuity trust is not particularly difficult, but you should be advised by an attorney with expertise in the area of charitable trusts and estate planning. To save you time and expense, we can provide you with an initial draft of the annuity trust agreement for review by you and your attorney. Once your trust agreement is signed, you can fund your annuity trust by transferring assets to your trustee.

Which Gift Plan Works Best for You?

You may be comparing an annuity trust with other gifts that return income – a charitable gift annuity or a charitable remainder unitrust. Each gift addresses particular financial goals, and you should choose the one that is the best fit for you.

Like the annuity trust, the gift annuity pays you fixed income. Because it is a simple obligation and not an individually managed trust, we can often pay you a higher income rate on a gift annuity than we can on an annuity trust. In addition, a gift annuity’s income payments come to you partially tax-free, and partially as capital-gains income if you contributed appreciated assets. Unless your annuity trust is invested in tax-free securities, all income will be taxed to you at ordinary income rates.

The annuity trust offers management flexibility, multiple beneficiaries and existence for a term of years rather than the beneficiaries’ lifetime.

The unitrust is even more flexible. In addition, its payout structure allows for income growth over time. We can show you how a unitrust paying 5 percent income will eventually outperform an annuity trust paying 6 or 7 percent.

The following chart compares the income and tax benefits from these three gifts:

Donors: Husband and Wife, 70 and 68
Asset contributed: $100,000, cash

.	Charitable Gift Annuity	Annuity Trust	Unitrust
Income rate	6.5%	5%	5%
Annual income	$6,500 (fixed)	$5,000 (fixed)	$5,000 (variable)
Tax-free	$3,452	-0-	-0-
Ordinary income	$3,048	$5,000	$5,000
Charitable deduction	$26,120	$43,170	$40,902

The University of Texas Health Science Center at Houston
7000 Fannin, Suite 1200
Houston, TX 77030
713-500-3200 | 713-500-3216 (fax)
E-mail: Shirley.Druggan@uth.tmc.edu