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Re-investment Using a Charitable Remainder Trust  The Challenge:
John
and Mary Smith, both 72 years old, are long-time supporters of Mines.
Over the years, they have accumulated a number of investments, including shares of the XYZ
Corp. that carry a market value of $250,000 and a cost basis of $25,000.
While the stock has performed well in the past, the Smiths feel that it has become
overvalued and may face a substantial decline in a volatile market.
Also, the stock yields little income—only 1% annually.
They are reluctant to sell, however, because they don’t wish to pay
substantial capital gains taxes.
After some discussion, John and Mary decide that they would like to accomplish the
following financial goals:
 Dispose of their
XYZ Corp. stock and diversify their asset base.
Find some way to
neutralize the impact of capital gains taxes.
Increase their
annual cash flow from the investment.
Keep assets
available for a gift to Mines.
The Strategy:
The Smiths' financial planner suggests that they establish a charitable remainder trust.
He tells them that they can transfer their XYZ stock to the trust, which will sell it,
re-invest the proceeds, and pay them income at a rate and for a period of time that they
choose in advance.
Because the trust is tax-exempt, no capital gains taxes will be due on the sale.
In addition, the funding of the trust will entitle the Smiths to a substantial charitable
deduction.
When the trust terminates, its remaining assets will be released to Mines for an endowment
fund or other purpose that John and Mary have specified.
Working with Mines' Office of Institutional Advancement, their financial planner estimates
that the Smiths can realize the following benefits from a charitable remainder annuity
trust that will pay them annual income equal to 7% of the trust's initial value:
Elimination of
potential capital gains taxes of $45,000.
A charitable
deduction of $93,923 - which may save $37,193 for a taxpayer in the 39.6% tax
bracket.
Substantially
increased annual income - from $2,500 to $17,500 per year. The Smiths' projected
after-tax income over 18 years is $195,714.
Mines projected
to receive $591,994 in 18 years.
Recognition for a
leadership gift of $250,000 to Mines.
John and Mary also learn that the Colorado School of Mines Foundation provides
comprehensive trust services to donors - typically without fee. This additional
benefit may save them thousands of dollars per year.
The Smiths' benefits are summarized in the following chart.
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