Real People, Real Planning

The following stories are true. Names have been changed to protect privacy.

• Bill and Mary Enjoy the Appreciation
  Bill and Mary reduce their capital gain tax burden on some appreciated property, earn lifetime income and an income tax deduction, and make a significant gift to Cornell University. Some additional opportunities are outlined.
  
  
• George’s Retirement Savings Plan Goes to Work for Cornell and His Family
  George overcomes a number of tax issues that keep him from enjoying his retirement plan, providing an inheritance for his children, and funding a professorship at Cornell.

• Helen Gives a Boost to Her Income and Cornell
  Helen finds a way to actually increase her lifetime income and establish a scholarship for Cornell students. Additional opportunities are outlined.

• Jean Saves for Retirement with a Charitable Plan
  Jean turns a charitable plan into a tax-advantaged retirement savings opportunity for herself. Additional opportunities are outlined.

• John and Betty’s Enhanced Private Foundation
  John and Betty discover a more effective and less costly way to support their various charitable interests – and leave more after taxes to their children.

Bill and Mary owned a significant tract of ranchland that had appreciated considerably in value over the years. They had inherited the property from his parents, and recently benefited from an increase in the area’s popularity among vacationers. They faced a steep capital gain tax on the appreciation if they sold the land. After discussions with the Office of Trusts, Estates & Gift Planning, Bill and Mary contributed the land to a Charitable Remainder Trust. Bill explained, “We got rid of the taxation issue and receive payments for life. We also did something for Cornell that we had wanted to do for a long time. Cornell is very dear to us.” With their contribution to a Charitable Remainder Trust, Bill and Mary avoided the capital gain tax due at the sale of the property while also earning an income tax charitable deduction. They will enjoy income for their lifetimes, then the remainder will go to Cornell. According to Bill, the Office of Trusts, Estates & Gift Planning was “very knowledgeable, supportive, and easy to talk to. Giving real estate to Cornell has been made a very straightforward process. We cannot thank them enough.” In turn, Bill and Mary have the gratitude of future generations of Cornellians.

How it works - a hypothetical example:
Donor contributes real estate or securities valued at $250,000 to a Charitable Remainder Trust (in January 2005). The property was originally purchased for $25,000 many years ago. The Trust is designed to pay 7% of its annual value to the donor.

• Donor avoids capital gain tax on $225,000 long-term appreciation.
• Donor receives income tax charitable deduction of $96,125.
• Donor earns $250,000 Cornell gift credit that may be applied toward funding goals or campaigns.
• Donor receives $17,500 payments in the first year. If the Trust investments grow at an annual rate of 8%, the income payments will increase, totaling $302,013 over the donor’s expected lifetime.
• Cornell may eventually receive a remainder amount of $293,145.

Alternative #1: Fixed Payments
The donor may choose to structure a Charitable Remainder Trust to pay a fixed dollar amount every year. Or, the donor may contribute to a Charitable Gift Annuity agreement, through which Cornell will pay a fixed amount to the donor for life.

Alternative #2: Flexible Payments
The donor may utilize some forms of a Charitable Remainder Trust that will allow the donor to defer income (allowing the Trust investments to grow tax-deferred) until a specified or flexible time in the future.

Alternative #3: Full Tax Benefits
The donor may give the property directly to Cornell, without an arrangement for receiving income. Cornell’s Office of Trusts, Estates & Gift Planning will take care of the sales process, and the donor will enjoy full avoidance of capital gain tax and an income tax deduction for the full appraised value of the property.

After many years of building up his tax-qualified employee retirement plan, George retired and was ready to enjoy the benefits of his savings. He wanted to use his retirement plan to fund his lifestyle, provide an inheritance for his children, and make some charitable gifts to Cornell University.

• George faced a number of problems, however:
  Forced minimum distributions from his retirement plan that increase each year;
• Income taxes on the distributions;
• Income tax liability on charitable distributions that may or may not be offset by an income tax deduction for the gift;
• A combination of estate and income taxes that erase much of the inheritance George intended for the children.

Through consultation with a Cornell Gift Planning Officer, George found a way to meet each of his goals. He established a Charitable Remainder Trust that will pay income (equal to 5% of the trust’s value at the beginning of each year) to his children after his death. The remainder will pass to Cornell after the children’s lifetimes.

• This plan offers multiple benefits to George and his family:
  During his lifetime, George will use the funds in his retirement plan as needed.
• After an initial contribution of $50,000 to establish the Charitable Remainder Trust, George will pass any excess required distributions from his retirement plan to the Trust (averaging about $25,000 over the next eight years).

  The income tax charitable deduction will offset some of his tax liability from the distributions.

  The gift tax charitable deduction will potentially reduce taxes for the transfer to George’s children who will receive income from the Trust.

• At George’s death, the retirement plan balance of about $1.5 million will pass to the Charitable Remainder Trust (already funded with $250,000 from excess required distributions during George’s lifetime).

  The estate tax charitable deduction will significantly reduce the estate tax burden.

• The children will receive roughly $5.5 million total income during their lifetimes. Given the children’s ages of 45, 47, and 50 in 2004, this assumes that George passes away in the year 2013, and that the Trust investments earn an annual return of 8%.

With his $1.75 million Cornell gift credit, George funded an endowed professorship that will carry the name of his late wife in perpetuity. He had the additional pleasure of seeing the professorship named during his lifetime.

At her 60th Reunion in 2004, Helen wanted to make a meaningful gift to the University, but she wasn’t comfortable giving away assets that produced income for her. In fact, the assets were barely producing the income she needed; her Certificates of Deposit (CDs) were only paying 3.5%, and the dividend yield from her stock investments was even less.

Helen was excited when a Cornell Gift Planning Officer explained that she could make a gift to Cornell and actually increase her cash flow at the same time. The income would also be guaranteed for Helen’s lifetime – no matter how long she lived.

Helen contributed $50,000 cash to a Charitable Gift Annuity at Cornell. In return, she is receiving 8% of the contribution, or $4,000, every year in income payments. Well over two-thirds of the income is tax-free. To top it all off, Helen received an income tax charitable deduction of $24,013.

But it was the charitable character of Helen’s contribution that gave her the greatest satisfaction: With $50,000 gift credit at Cornell, Helen established a scholarship for undergraduate students that bears her name.

If she preferred, Helen could have chosen some other attractive options:

Alternative #1: Additional tax savings
If Helen’s stock holdings had appreciated in value over more than a year, she could have contributed the stock shares and avoided the capital gain tax that would be due when she eventually sold the shares. Some of that capital gain tax liability would be attributed to the income she receives from the gift annuity, but she would avoid some of the tax entirely and spread the rest over her expected lifetime.

Alternative #2: Protecting Against Inflation
If Helen wanted the income to increase over time, she could take some risk with an arrangement that pays income that varies with investment performance. Such tools as a Charitable Remainder Trust or Pooled Life Income Fund reinvest the contribution and pay income based on the performance of investments within the Trust or Fund.

Jean T, aged 50, was a successful professional who had exhausted the traditional tax-advantaged retirement savings options open to her. She planned to retire at age 65. She wanted to do something significant for Cornell and augment her retirement income as well.

Jean decided to contribute $100,000 in October 2004 to a special kind of Charitable Remainder Trust designed to begin producing income for the rest of her life at the time of her retirement. When payments begin, she will receive 5% of the trust’s annual value and, at her death, the funds remaining in the trust will pass to Cornell.

If the trust averages an 8% annual return and she lives her normal life expectancy, Jean can expect the following results:

Income tax charitable deduction: $28,103
Payments to Jean: $14,686 in first year ($368,866 total for lifetime)
Remainder gift to Cornell: $515,039

If she wished, Jean could have chosen some other charitable options:

Alternative #1: Greater Flexibility
Jean could have established a different type of Charitable Remainder Trust that would offer the potential to begin paying income immediately. Jean, however, could indicate to Cornell’s Office of Trusts, Estates, and Gift Planning that she would like to defer the income payments until an unspecified later date. Through Cornell’s investment management, the deferred payments may accumulate within the Trust until a time when Jean wants the part or all of the deferred income to be paid to her. She does not have to specify a payment beginning date when she establishes the Trust.

Alternative #2: Guaranteed Payments
Jean could have established a Deferred Charitable Gift Annuity and arranged for income payments to begin when she reaches age 65. As with a standard Charitable Gift Annuity, payments are fixed, based on the age of the income beneficiary, and will continue for Jean’s lifetime. Cornell University’s full resources back the payment commitment. By selecting a date in the future to begin payments, Jean would earn a higher rate of income.

In addition to Cornell, John and Betty had a variety of charitable interests. They enjoyed making gifts to their various interests at times of their choosing and for projects that were most fulfilling and effective. They also believed strongly in teaching their children and grandchildren the value of philanthropy as citizens and as individuals.

John and Betty had considered forming a private charitable foundation. That would give them and their family control over their philanthropy, and it would remove assets from their taxable estate. Transferring assets to a foundation, however, meant depriving their children of those resources and contending with excise taxes, management issues, and complex self-dealing rules – not to mention the legal costs of establishing the foundation.

An article in the Vested Interest publication by the Office of Trusts, Estates & Gift Planning alerted John and Betty to an opportunity to reduce estate taxes, actually enhance the net estate to their children, and create a sizable charitable fund for their family’s philanthropy. In March 2003 John and Betty contributed $10 million to a Charitable Lead Trust that would pay an annual amount (7% or $700,000) to Cornell as charitable gifts. When the Lead Trust terminates in seventeen years, the balance will transfer to John and Betty’s children. Thanks to a gift tax charitable deduction, the entire balance will pass to the children gift and estate tax-free.

The $700,000 per year from the Lead Trust will go to the Cornell University Foundation – A Donor-Advised Fund. The Cornell University Foundation allows John and Betty to build a charitable account from which they and their family members can advise Cornell to make gifts to any qualified charity, including Cornell. Unlike commercial donor-advised funds, the Cornell University Foundation does not charge fees, and John and Betty can enjoy the investment expertise of Cornell’s money managers.

The results (assuming an 8% annual return for investments in the Trust and Foundation):

• The children will receive an inheritance of over $13 million, free of gift and estate taxes.
• John and Betty’s account at the Cornell University Foundation will grow to over $25.5 million within 17 years.

Alternative #1: Pick and Choose
John and Betty could have used either the Charitable Lead Trust or the Cornell University Foundation separately, to meet more specific estate planning goals.