Life Income Gifts

Making A Life Income Gift

Many alumni and friends of Norwich, who might wish to make a major contribution to the University during their lifetimes, are often unable to do so because they depend upon the income earned on a particular asset.& Many assets produce a relatively low rate of return, but if they were sold and reinvested in higher yielding securities, you might be subject to a capital gains tax on the appreciation in the asset.&

Tax and Other Advantages of Life Income Gifts

You may make a life income gift to Norwich University by irrevocably transferring the asset to Norwich but retaining for yourself, or your beneficiary, the income earned from the asset.& Norwich reinvests the assets to produce a significantly higher rate of return.& You gain an income tax deduction for the gift, are no longer subject to an immediate capital gains tax, and you reduce the amount of your taxable estate by the value of the donated asset.

When you no longer need the income from the asset, or you pass away, the remaining principal of the asset will pass to Norwich to support the programs of your choice.

Choosing How Your Life Income Gift Will Be Used

Unrestricted gifts are, in a sense, the most valuable gift to Norwich, as they allow the University to cope flexibly and imaginatively with future needs and organizational changes.

Restricted gifts support ongoing University needs such as faculty salaries, undergraduate scholarships and the library. They can also be used to build and maintain facilities or to underwrite research. Endowed scholarship funds provide income every year in perpetuity to carry out the designated purpose of the gift. These gifts must be funded at a minimum value of $25,000.

Naming a fund: Funds may be named in honor of the donor or to memorialize another person or persons. Named funds remain visible in the Norwich community because of the people and activities they support. As a result, they also encourage others to give.

Types of Life Income Gifts

There are several principal types of life income gifts, providing you with a range of choice in your investment and estate planning.& One of these options may be ideally suited to your particular circumstances. These gifts are described briefly below. If you have any questions or would like more information, please contact Priscilla Gilbert, Director of Planned Giving, at 802.485.2301 or email pgilbert@norwich.edu.

Charitable Gift Annuities

A charitable gift annuity combines both charitable giving and financial investing.& In exchange for an irrevocable gift of cash, securities, or another marketable asset to the University, Norwich agrees to pay you and, if you wish, a second beneficiary (“annuitant”), a guaranteed income for life. The rate of annual income payout is determined when the annuity is created based on the annuitants’ ages and the economic environment. The rate is based on the recommendation of the American Council of Gift Annuities (ACGA) and is the rate used by most charitable organizations.

By transferring low-yielding appreciated securities you may increase your annual income significantly while obtaining other tax advantages, including a current income tax deduction, and a reduction in capital gains liability. Unlike life insurance annuities, the annual income of a gift annuity is locked in at a fixed rate of return. This allows you to receive a guaranteed income without being subject to market volatility. Also, unlike an insurance annuity, no management fees are levied on the principal of your investment, meaning you are guaranteed to receive the entire income each year.

Depending on your financial circumstances, you may prefer to delay receiving any annual income, perhaps until your retirement. By deferring payment of annual income, you will increase the annuity payments you will eventually receive, as well as increase your immediate charitable tax deduction.

While we suggest that you consult with your tax or legal advisor regarding the benefits of a charitable gift annuity, you do not need to retain a third party to finalize or administer this gift. The Norwich University Planned Giving Office will provide gift benefit summaries, annuity examples and an annuity agreement for your review. We will also provide you with the necessary tax reporting documents so that you may receive the full tax benefits of your gift.

Charitable Remainder Trusts

A charitable remainder trust offers yet another way to retain or assign income from an asset, while making a larger gift to Norwich than might otherwise be possible. You donate an asset, whether cash or appreciated securities or other property that can be sold, to create an irrevocable trust fund. You, or a beneficiary you name, receive a fixed income for life or for a specified period, up to 20 years. When these payment obligations have been fulfilled, the remainder of the trust fund passes to Norwich.

As with other life income gifts, you receive an immediate income tax deduction, eliminate any capital gains tax if the asset is sold and reinvested and reduce your taxable estate, while generating income for yourself, your spouse or another named beneficiary.

The Charitable Remainder Trust differs from other life income gift vehicles in that you can specify the type and size of payment made to you as well as who will manage the trust.

A Charitable Remainder Annuity Trust pays a fixed dollar amount annually. At the time the trust is created, you specify the annual dollar amount to be paid regardless of the investment performance in any given year.

A Charitable Remainder Unitrust pays a fixed percentage income, based on the value of the trust assets each year. You specify the percentage rate when you set up the trust fund and that rate of return remains set for the duration of the trust.

A Charitable Remainder Net Income Unitrust pays the lesser of (1) the trust’s total dollar income earned each year, or (2) a specified percentage of the principal regardless of actual earnings. This type of trust allows for growth in years of high performance and protects against depletion of principal in years of modest performance.

Net Income Unitrust With Make-up Provision is a unitrust distinguished by the added provision that allows it to recoup the income lost due to a lower than expected investment return in certain years. This is done by increasing the income paid out in subsequent years, when the investment performance exceeds expectations. If the trust earns less than the set percentage payout in one year, the net income is paid. At some future point, when the trust earns more than the stated percentage, the trust will pay the beneficiary as much income as is necessary to bring all prior payments up to the full amount specified, had the annual percentage return met its target.

A net income unitrust with make-up provision is excellent for donors who wish to prevent erosion of principal during lean years, or who are contributing property that is not readily convertible into income-producing investments. The make-up provision also allows the donor to plan for the future in a more strategic manner.

Charitable Lead Trusts

A charitable lead trust is the opposite of a charitable remainder trust. In a charitable lead trust, Norwich receives the income (or “lead” interest) produced by the trust for a fixed period of time, typically 10 to 20 years. After that payout obligation is fulfilled, the principal (or “remainder” interest) passes to the beneficiaries chosen by the donor (possibly one’s grandchildren) or reverts to the donor.

There are three types of lead trusts:

  • A Regular or Statutory Lead Trust is created to pass property on to the donor’s named beneficiaries at a reduced gift or estate tax cost;
  • A Grantor Lead Trust is applicable to a donor who wishes to receive an immediate income tax deduction; and
  • A Common Law Lead Trust is designed to remove an income stream from the donor’s tax return for the duration of the trust but have the asset return to the donor’s beneficiaries.

The tax treatment and financial planning implications are quite different for each type of lead trust, so it is important to obtain counsel in reviewing and creating such a gift vehicle.

More Information

Please contact Priscilla Gilbert, Director of Planned Giving, for more information at 802.485.2301 or email pgilbert@norwich.edu.

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