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My alma mater, like many colleges and charities, offers the option for larger donations of setting up a charitable remainder trust. Basically, in exchange for your committing the donation while you're still alive (rather than in your will), they pass along some of the investment returns on those funds.

In the simplest form of this, you're basically buying an annuity; they commit to returning 5% (or something similar) of your donation to you each year. Since they figure they can get 8% to 10% returns by investing it in their endowment fund, this works out in their favor even before the term ends and they get to keep it all.. Meanwhile you get to claim the tax write-off from the donation and get a guaranteed income stream (which you do have to pay taxes on, of course).

Not a bad deal for money you'd otherwise have parked in bonds for the long term or that you'd use to buy a more normal insurance-company annuity, assuming you do intend to donate eventually. Or so it seems.

(There are more complicated versions where you accept more of their risk in exchange for more of their return, but the above covers the basic idea)

My questions: Are there any hidden pitfalls in these trusts to watch out for, or are they really as much of a win/win as they appear? And how early, and to what degree, should I start considering making these part of my retirement investment plan, assuming that I plan to route at least 10% of my estate to charity anyway?

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A few things to consider -

  1. A non-fixed percentage will affect your income tax deduction. This is because you will be generally getting more money back, making it a smaller donation.
  2. The assets are out of your control and are the property of the foundation. The longer the horizon to make this decision, the more this is a factor since you can't change your mind. Make sure the institution is stable and you trust the leadership.
  3. Your risk tolerance. Depending on your timeline, you can likely choose investments that make a better return (e.g. equity), which would give you more funds to donate. However, if you are nervous putting this money in a more aggressive investment, that may be a warning you don't have the financial margin in your net worth to make this large of a donation. If you possibly might need the money, that is a large pitfall.
  4. Asset type. A charitable foundation can convert an asset to cash without capital gains taxes. If your assets to donate are real property or stocks this could save you lots if you are already planning on giving the money away.
  • All valid points. Balancing then all may be... Interesting... ;-) – keshlam Mar 18 '16 at 2:07
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You need to check how much of the total is deductible. It's something less than 100%. Your annual payment received is partially tax free as a return of principal, as with any fixed immediate annuity. What's tough, is that rates are so low today that locking in any fixed annuity type product can be disappointing long term. In the end it's the fixed annuity you should compare to, and to that, add on the tax perks.

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    Actually one of the options in the case I'm looking at is non-fixed, floating as a percentage of the current ( at that time) value of the donation, where the donation's value tracks growth in the endowment fund. That means betting on the market and the endowment management's ability to take advantage of it... But on the flip side it means being able to participate in investments like venture capital which require a bigger buy-in than I'd want to make as an individual. Guaranteed 5% of a share of that, seems quite interesting... given expectation I'll donate eventually anyway. – keshlam Mar 16 '16 at 23:34
  • Nice, but very surprising. Every one of these I've seen has been the fixed type. Still, I'd want to understand what the tax deduction is for the donation, and what portion of payment is tax free. That combination multiplies your return a bit. – JoeTaxpayer Mar 17 '16 at 9:48

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