Below is a list of terms that are often used in connection with our charitable programs.
501(c)(3)
Section of the Internal Revenue Tax Code that defines nonprofit, charitable, tax-exempt organizations. “Corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition, or for the prevention of cruelty to children or animals”.
Appreciated Assets
Assets that have a higher market value than their basis or tax-purpose value. Such assets would, if sold by an individual or non-charitable organization at a price higher than their basis, potentially generate a taxable capital gain (either long-term or short-term depending on the holding period.)
Basis
The tax-purpose value of the property or asset used in establishing the potential capital gain amount. Basis is the figure used to determine the amount of gain or loss on a sale or exchange. Generally, the basis is what a taxpayer paid for an asset. But there may be adjustments to the basis (adjusted basis,) e.g., depreciation, improvements.
Beneficiary
The person and/or organization who receives the benefits (usually assets or income) of the trust.
Bequest
A gift of property or assets to a beneficiary as defined in a will.
Capital Gains Lock
When appreciated property is producing little or no income, and is not sold because the owner(s) do not want to incur capital gains tax. It is “locked up” because of the capital gains tax.
Charitable Lead Trust
During the term or life of the charitable lead trust, an annuity or unitrust income interest is distributed each year to the designated charitable beneficiary and the assets are eventually transferred to the trustor’s or grantor’s designated non-charitable beneficiary or beneficiaries.
Charitable Ownership
When it comes to philanthropy, most people are renters – typically making donations by writing a check based on the amount they feel they can spare at any given time. This takes money out of their current cash flow, and often is not the best way to support a charitable planning program – especially if you want it to be efficient and effective, both for you and the charity.
Establishing a family foundation account is the philanthropic equivalent of owning your home, not renting a place to live. Principal (contributions) made to your family foundation is preserved and invested. This becomes a family charitable account which distributes annual income or growth to family-selected charities.
Your family foundation account becomes the vehicle through which annual charitable contributions are made, instead of using cash flow. You and your family now have “charitable ownership” that will benefit philanthropy in perpetuity without reducing current cash flow. Charitable ownership gives you a great amount of donor direction.
Charitable Remainder Trust (CRT)
Please see CRT Advantage™
Component Fund
A fund that is part of the exempt assets of The American Foundation™.
Contribution
Assets given to a family foundation or other charitable gift plan.
The CRT Advantage™
An irrevocable charitable trust set up at The American Foundation™ by taxpayers who have appreciated assets (real estate, stocks, mutual funds, etc.) and want to sell those assets without incurring capital gains tax at the time of the sale. This allows the full value of the assets (not 85% – due to capital gains tax) to be invested, which results in the generation of the maximum amount of income from the sale of these assets. The CRT Advantage has two options to pay income to one or more income beneficiaries (usually donor or donor and spouse): there can be a lifetime income stream, or the income stream can be received for a period of years (not to exceed twenty years).
This income stream is based on a fixed percentage (which cannot be less than 5%) of the net fair market value of the trust assets. The trust payout percentage (for example, 8%) is determined when the trust is created and remains constant for the entire term of the trust. The unitrust assets are revalued annually. Therefore if the value of the trust increases or decreases, the income stream would also increase or decrease since it is based on a fixed percentage payout.
The CRT Advantage is a form of a charitable remainder trust (CRT). However in a traditional CRT when the donor(s) are deceased, the “remainder interest” has to be distributed to a charity or charities and that terminates the CRT and any more income to charities. With the CRT Advantage the “remainder interest” flows into your family foundation account to create a perpetual charitable legacy for your family. This perpetual charitable legacy allows your heirs to continue to support the charities of your choice for many generations to come.
CRT Advantage™ Annuity Trust
A trust which is set up to pay a return based on a fixed annual percentage (which cannot be less than 5%) of the net fair market value of the assets initially placed in the trust. The trust assets are valued at the time the property is placed in trust. The trust assets are never revalued. The same dollar amount will be paid to the income beneficiary or beneficiaries for the rest of their lives. No additional assets can be placed in the trust after the initial funding of the trust.
Donor
An individual who has established a family foundation account, CRT Advantage™ or other charitable gift plan.
Family Foundation
An ongoing charitable account created to provide permanent support for charitable activities. Assets donated to a family foundation account are invested and a portion of the annual investment income or growth is distributed to family selected charities. An individual family foundation account at The American Foundation™ is a component of The American Foundation™.
Family Foundation Specialist™ (FFS) –
A designation used by The American Foundation. This designation is awarded to employees and financial advisors who have successfully completed a course of intensive training conducted at The American Foundation Home Office in Phoenix, AZ. This course is comprehensive in nature and covers estate planning, tax issues, charitable planning, family foundation planning, and specifically how CRT’s and family foundations established with The American Foundation are structured to maximize philanthropy. The American Foundation has a unique approach to creating philanthropy and the FFS designation shows a mastery of this approach.
Family Foundation Advantage™
1) Our family foundation public charity format has a tax advantage over private foundations. 2) Principal is preserved so philanthropy benefits in perpetuity which is an advantage over many charities and foundations. 3) All administration and tax reporting is done for you. 4) Our minimum amount to fund a family foundation account is only $5,000, an amount substantially lower than most other foundations. We wish to encourage philanthropy by making it affordable for everyone.
Gift Annuity
Cash or appreciated securities which are transferred to a family foundation account in return for a specified income stream for life, or a term of years, at a guaranteed rate, unaffected by stock fluctuations. Part of the income is tax-free (return of principal).
Grant
Charitable donation of funds made to public charities from family foundation accounts and charitable lead trusts.
Income Beneficiary
The recipient of income from a charitable trust.
Investment Advantage™
A unique investment strategy. This strategy provides a distinct advantage to investors with a focus on short-term high yielding, first position deeds of trust.
Irrevocable Life Insurance Trust (ILIT)
Please see “Wealth Enhancement Trust”
Philanthropy
The effort to increase the well-being of humankind and life on the planet by charitable donations.
Privatization of Philanthropy™
Privatization of Philanthropy™ means creating family foundation accounts where there is ongoing donor (or donor family) involvement and direction over charitable grant making. These individual, family, and corporate foundations are created in the more advantageous public charity setting, where individuals, family members, and corporate executives retain the ongoing direction over charitable distributions.
Probate
The legal process of proving a will, appointing an executor, and settling an estate. By custom it has come to be understood as the legal process whereby a dead person’s estate is administered and distributed.
Protection of Principal
The term “Protection of Principal” is defined for the purposes of our programs as “our intention is to distribute income only, and not principal”. Preservation of Principal does not mean we will never incur investment losses.
Public Charity
An organization described under IRC§501(c)(3), 509(a)(1) and clauses (i) to (vi) of IRC§170(b)(1)(A) of the Internal Revenue Code of 1986. If an organization is described in clauses (i) to (vi) of IRC §170(b)(1)(A) and is also described in clause (iii), it shall be treated as a public charity. Examples of public charities are churches, schools, boy scouts, community chest, etc.
Remainder Interest
The amount remaining in a charitable trust when the donor(s) become deceased. In a traditional Charitable Remainder Trust (CRT), the “remainder interest” is distributed to a charity or charities and that ends the income stream to charities. With the CRT Advantage the “reminder interest” flows into the donor(s) Family Foundation account to create a charitable family legacy that will benefit charities in perpetuity.
Retained Life Estate
A gift plan defined by the federal tax law allowing the donation of a personal residence (to include a vacation home) or farm with the donor retaining the right to life enjoyment. A life estate may be retained for one or more lives or it may be retained for a term of years. All routine expenses-maintenance fees, property taxes, repairs, etc. – are the responsibility of the donor. The donor receives income tax benefits in the year of the gift (the property is irrevocably deeded to the charity) and estate tax benefits.
Support Organization
A foundation formed in support of a particular charity or cause. A support organization is an entirely separate entity (that can be established in affiliation with the American Foundation). It has its own 501(c)(3) tax status and its own participating members on the board.
Successor Charitable Advisor
Person appointed to make distribution recommendation if donor(s) are no longer willing or able to.
Tax-Preferred or Tax-Advantaged Income
Income which is tax exempt or eligible for greatly reduced or favorable tax status. Income taxed less than “ordinary” income.
Testamentary Trust
A trust written into a will. It is set in motion by the court after the will reaches a certain point of execution, and is used only after the death of the person whose estate that it represents.
Trust
Any arrangement where property is to be held and administered by a trustee for the benefit of those for whom the trust was created. Depending on the type and how it is established, a trust may be revocable (changeable) or irrevocable (not changeable.)
Trustee
The person or institution named by a person making the trust, or appointed by the court, to carry out the terms of the trust. Assuming a trust has been set up through a will, when the executor’s job is finished, the trustee’s job begins.
Trustor
The individual who establishes the trust. Also referred to as the Grantor and/or Settlor.
Wealth Enhancement Trust™
An irrevocable trust that is funded with a life insurance policy usually up to an amount equal to the value of the assets transferred to your Family Foundation account or CRT Advantage trust. Because the policy is owned by an irrevocable life insurance trust (ILIT), it is not included in the estate for estate tax purposes. Also under current tax law, life insurance proceeds are not subject to income tax. Therefore, by establishing a Wealth Enhancement Trust heirs will receive the equivalent value of the assets transferred to your Foundation account or CRT Advantage trust – both income tax and estate tax free. This is a very important part of the family foundation planning process. Other names used for the Wealth Enhancement Trust are “Asset Replacement Trust” and “Wealth Replacement Trust”.
Will
The legal expression or declaration of a person’s mind or wishes as to the disposition of the person’s property, to be performed or take effect after the person’s death