Glossary of Terms

Annuity Trust

A type of charitable remainder trust that pays the same amount every year. This annual amount is determined when the trust is established and must be at least 5% of the initial fair market value of the trust’s assets.

Bargain Sale

A bargain sale is part gift and part sale. A donor can give appreciated property to the College at a “bargain” price. Because of the less than fair market value sales price, the donor reports a smaller capital gain and receives a charitable income tax deduction for the net value of the gift. (Note: under current tax law, each individual has a $250,000 capital gain exemption on the sale of a primary residence.)

Bequest

With a bequest a donor can name Dartmouth College in his or her will as the recipient of all or a part of his or her estate at death.

Beneficiary

The person or persons whom you designate to receive the benefits or proceeds of your financial instruments.

Charitable Gift Annuity

A contract between a donor and Dartmouth College that will provide a fixed income for the life of the donor or other designated beneficiary. The program is backed by the total assets of the College. There are no management fees or investment worries. Rates offered are based on the annuitant’s age at the time of the gift. Payments are made quarterly, and a substantial portion of each payment is received tax free.

Gift annuities generate an immediate charitable income tax deduction. Capital gains are reduced dramatically and can be reported over a number of years so that those taxes are not due all at one time.

Annuities based on two lives are also available, but the rates are generally lower.

Charitable Lead Trust

The opposite of a life income gift arrangement: the donor places assets in trust, and the trust generates annual income for charity over a period of years. After a specified length of time, the assets come out of the trust and become the property of the donor’s heirs.

The lead trust is a valuable means of transferring assets to heirs at reduced gift and inheritance taxes. Although the donor will likely pay gift taxes (and possibly generation-skipping taxes) upon creating the trust, the assets in the trust will grow tax-free during its term, which is typically 20 years. When the heirs receive the assets at the end of the trust term, there will be NO inheritance taxes applied to that transfer.

The donor can name multiple charitable beneficiaries to receive payouts from the trust during its term. The donor can also use non-cash, income-producing assets to fund the trust. Commercial real estate is a good example of a non-cash asset that can be passed to younger family members through a charitable lead trust.

Charitable lead trusts are complex and require advice from experienced attorneys.

Charitable Remainder Trusts

Flexible instruments that enable donors to:

  • Claim a charitable tax deduction in the year the gift is made.
  • Provide an income stream for themselves or someone else.
  • Remove assets from their taxable estate.
  • Make a significant gift to one or more charities.

A donor can place an asset in a trust and designate a trustee to manage the trust. From that trust, the donor (or a person that the donor has named) receives a specified sum at set intervals—usually every quarter. When the donor or beneficiary dies, or after the predetermined number of years, what's left in the trust (the “remainder”) goes to Dartmouth College and/or other charitable organizations. The annual payments differ according to the kind of trust.

An Annuity Trust pays the same fixed dollar amount every year. This annual amount is determined when the trust is established and must be at least 5% of the initial fair market value of the trust's assets.

A Standard Unitrust pays a variable amount each year. The amount is equal to a predetermined percentage of the fair market value of the trust that year, at least 5%.

A Net Income Unitrust also pays a variable amount each year. The amount is equal to the net income produced by the trust that year or a predetermined percentage of total assets, whichever is smaller.  In addition, a trust provision can be added to provide that payments may be increased in some years to make up for the earlier years when net income was lower than the predetermined percentage.

A Flip Trust is a hybrid of a net income trust and a standard unitrust. This vehicle is especially useful when funding a trust with an illiquid asset such as real property or tangible personal property. Until the asset is sold, the trust only pays the lesser of the net income or the stated payout rate. Once the illiquid asset is sold, the trust “flips” and begins to act like a standard unitrust paying the stated payout rate. Trusts are very well suited for gifts of cash and appreciated securities, and can also be funded with real estate, privately held stock, or other non-cash assets.

Charitable remainder trusts allow donors flexibility in that they may choose their own payout rate and their own trustee. The minimum payout rate allowed by law is 5%.

The Dartmouth program offers both unitrust (variable income) and annuity trust (fixed income) options. Unitrust income is calculated by applying the payout rate to the value of the trust assets at the beginning of each year, allowing the beneficiary's income to keep pace with growth in the assets over time. Annuity trust income is determined at the time the trust is funded by applying the payout rate to the initial value of the trust.

Cost Basis

The amount you pay for an asset such as shares of stock or real estate. This figure is used to determine how much appreciation (capital gain) you have in an asset.

Deferred Gift Annuity

Provides a fixed income for the life of the donor or another designated beneficiary.  It is similar to a charitable gift annuity except the beneficiary’s income payments are deferred to a later date. That provides a higher charitable tax deduction when the gift is made and locks in a higher payout rate. For example, a 50-year old donor agrees to make a gift now, but defers receiving payments until she or he reaches age 65, when it will serve as supplemental retirement income. The deferral of payments locks in a higher fixed rate.

The gift assets are backed by the total assets of the College. There are no management fees or investment worries for donors. The minimum gift amount is $10,000. Annuity payments are determined by three things:

  • Age of the beneficiary at the time of the agreement
  • Age of the beneficiary when payments begin
  • Length of deferral (the longer the deferral, the higher the rate)

Deferred gift annuities based on two lives are also available, but at lower rates.

A substantial portion of each payment is tax-free. Even though the beneficiary does not start receiving payments until a pre-selected future date, a portion of the gift is immediately deductible for federal income tax purposes on an itemized return.

Capital gains are reduced and can be reported over a number of years (if the donor is also the income beneficiary).

Estate Tax

The tax levied on transfers of wealth that happen at death. Beginning in 2013, an individual can leave $5.25 million to others before triggering an estate tax.

Flexible Gift Annuity

A flexible gift annuity is structured so that the annuitant has control over the date at which payments begin. This may be a good gift vehicle for those who are unsure of their retirement date.

Flip Trust

A hybrid of a net income trust and a standard unitrust. This vehicle is especially useful when funding a trust with an illiquid asset such as real property or tangible personal property. Until the asset is sold, the trust only pays the lesser of the net income or the stated payout rate. Once the illiquid asset is sold, the trust “flips” and begins to act like a standard unitrust paying the stated payout rate.

Gift Annuity

A contract whereby the donor makes a gift to the College. In turn, Dartmouth promises the donor, or another specified beneficiary, a fixed dollar payment every year for life. The yearly payment is based on the amount of the gift and the age of the income beneficiary at the time of the gift. Gift annuities may be for one or two lives.

Gift Tax

The tax levied on gifts to non-charitable beneficiaries. Currently, an individual can give away $14,000 each year to any number of individuals without being subject to gift tax. Transfers over and above that $14,000 may be subject to gift tax.

Living Trust

A document with which you direct the transfer of your assets at your death. A living trust helps assets pass outside of the probate process, can continue after your death, and is revocable at any time.

Living Will

A document that expresses your decision as to whether your life should be prolonged by artificial means if you are suffering from a condition in which additional medical procedures would only artificially delay death. This instrument directs your family and physicians to honor your intentions and acknowledges your acceptance of the consequences of refusing further treatment. You may specify which medical interventions you do or do not wish to be used, and under what conditions.

Long-Term Assets

Any asset that you have held longer than one year.

Pooled Income Funds

A gift is pooled with other contributions in a professionally managed fund. The donor or other beneficiary receives a proportionate share of the fund's annual income for life. The income varies depending on how much the fund earns and the number of shares the donor holds in the pool. Dartmouth College has three pooled income funds. The Samson Occom Pooled Income Fund seeks significant long-term growth of income. This fund provides the highest tax deduction and potential growth of income of any of the pools. The John Ledyard Pooled Income Fund provides moderate growth of income and an ample current yield. The Old Pine Pooled Income Fund is designed to provide a generous current yield and a high degree of safety from market uncertainties. This fund is particularly appealing and appropriate for older beneficiaries.

Power of Attorney

You can name someone—not necessarily an attorney—to make financial and other important decisions for you in case you become mentally or physically incapacitated. Unless this document exists, the court can appoint someone to make these decisions for you.

Probate

Probate is a judicial process in which ownership and distribution of assets are reviewed. Probate can be costly and time consuming and the court's proceedings are, by law, a matter of public record. Ways to avoid probate include assignment of life insurance, placing assets in a revocable trust, establishing joint tenancy with rights of survivorship, and designating beneficiaries on retirement accounts.

Rates

Dartmouth College’s charitable gift annuity rates are based on the recommendations of the American Council on Gift Annuities, a national nonprofit organization that uses detailed actuarial research into life expectancies to publish suggested annuity rates for charities. In some cases, Dartmouth’s chief financial officer adapts the ACGA recommendations to best suit the needs of the College and its donors.

Remainder Interest

See “Retained Life Estate”, below.

Retained Life Estate

With retained life estate plans a donor can give a personal residence, such as a home or condominium, to charity and retain use of the property for the remainder of her/his life. The donor continues to occupy the property yet takes a charitable income tax deduction for the “remainder” interest given to charity. The donor continues to be responsible for taxes, insurance and maintenance on the property until his or her death. If the donor chooses to move out of the property, the gift is accelerated and the donor can claim an additional charitable tax deduction.

Split-Interest Gift

Any gift in which a portion is assigned to charity and a portion benefits the donor or his/her designee. Charitable gift annuities, pooled income funds, and charitable remainder trusts are all varieties of split-interest gifts.

Step Up

A “step up” in cost basis refers to the value of property received from an estate that will have a cost basis equal to the asset’s value at the time of death (or six months after death, depending on the choice of the executor in filing federal estate tax returns). This value could well be higher (stepped up) than the original purchase price of the property and would be the basis for determining any future capital gains.

Tangible Personal Property

The IRS defines tangible personal property as “any property, other than land or buildings, which can be seen or touched. It includes furniture, books, jewelry, paintings, and cars.”

Unitrust

A standard unitrust pays a variable amount each year. The amount is equal to a predetermined percentage of the fair market value of the trust that year (at least 5%).  A net income unitrust also pays a variable amount each year. The amount is equal to the net income produced by the trust that year or a predetermined percentage of total assets, whichever is smaller. (Trust provision can provide that payments may be increased in some years to make up for earlier years when net income was lower than the predetermined percentage.)