san martin trees


A common investment vehicle currently used by many people is tax-deferred annuities. Tax Deferred Annuities, allow for a higher investment return by accumulating income on a tax deferred basis, please note that the income is accumulated on a tax deferred basis not a tax-free basis. Income tax on the investment growth is postponed until the money is withdrawn from the annuity contract, which is typically coupled with a life insurance contract. Current annuities maintain their tax-deferred basis because of their linkage with the benefits of a life insurance contract.

A Tax Deferred Annuity is a contract between an insurance company and an individual buyer. The contract may be purchased with either a single payment or a series of payments.

If the annuity is a fixed annuity, the issuer guarantees payment of both principal and interest, subject to certain charges.

In a variable annuity, the value of the account can fluctuate up and down with changes in the market value of the underlying investment securities owned.

A Tax Deferred Annuity offers the same benefits as a non-deductible IRA but without the contribution limit, the mandatory withdrawal requirement at age 70½, and without all of the record keeping and reporting requirements.

With a variable annuity, the value of the account will fluctuate with changes in the market value of the underlying investment securities owned.

The investment performance of the underlying securities will determine the amount of money available at the time of withdrawal. This could be more or less than the amount of the original investment. With a fixed annuity, in contrast, the insurance company guarantees both the principal and interest against loss. It is critical that the investor recognizes whether they are investing in a fixed or variable annuity.

The buyer has three methods of obtaining funds from an annuity:

          • Partial withdrawal: which is subject to contract fees and charges.
          • Complete withdrawal: which is subject to contract fees and charges also.
          • Periodic payments: (normally for life) periodic payments occur upon the annuitization of the contract, which generally occurs at retirement.

While the funds are in the annuity they grow, income tax deferred.

Under current law, withdrawals from the annuity prior to annuitization are taxable and will be considered as though the interest portion comes out first and the return of investment contribution second. (IRC Section 72) (E).

Income payments received after the contract is annuitized are partially non-taxable, with a portion of each payment considered to be a return of the buyers invested capital.

In general, the excludable portion is determined by dividing the amount paid for the contract by the number of years the annuity is expected to pay. Government life expectancy tables are published for a single life and for joint lives. The amount received each year in excessive of the excludable portion will be taxed as ordinary income. Variable annuities are sold by prospectus only. The prospectus contains important information regarding charges and expenses. Each potential investor should read the prospectus carefully before investing, make sure they understand completely any penalties or charges for early withdrawal, and understand the risk that they are taking.


A Charitable Remainder trust is a special tax exempt irrevocable trust arrangement written to comply with federal tax laws and regulations. You transfer cash or assets to the trust and may receive income for life or, if you choose, a certain terms of years.

In fact, the income can be paid over your life, your spouse’s life and even your children and grandchildren’s lives. You can select from two basic types of Charitable Remainder Trust depending upon your objectives.


The Charitable Remainder Annuity Trust is established by transferring selective assets or cash to a trust. The trust pays the income beneficiary an annual fixed dollar amount equal to a percentage, which you select, of the initial value of the assets transferred. If you choose, this income can also be paid to survivors for their life times. At termination, the remaining trust assets belong to your selected charity.

For example, a donor transfers $100,000 to an annuity trust. She decides to receive eight per cent of its initial value or $8,000 annually, paid in monthly installments for her life and for the life of her husband.


The Charitable Remainder Antirust is established by transferring cash or other assets to a trust. The trust pays an annual life-time or term payment equal to a fixed percentage (selected when the trust is established) of the fair market value of the trust’s investments as re-valued on the first day of each year. For example, a donor transfers $100,000 to a Unitrust and decides to receive, for life, eight per cent of the fair market value of the trust assets at the beginning of each year. In the first year he receives $8,000 in monthly payments. If the trust assets were worth $110,000 at the beginning of the next year he would receive $8,800. At termination the assets are paid to his selected charity.


Charitable Remainder Trust results in a current income tax deduction for Federal and many States tax purposes. The tax deduction is equal to the actuarially determined the present value of your gift to charity after the death of the last income beneficiary. The deductible amount is determined by application of the internal revenue service life expectancy tables.

To the extent that you can not use the entire deduction in the year of your gift, you may carry the excess deduction forward and write it off over the next several years. Generally speaking, the greater the age of the income beneficiaries and the smaller the retained income, the greater the deduction.

Immediate capital gains taxes are also avoided when you sell appreciated property. On the sale of an appreciated asset after transfer to the tax exempt Charitable Remainder Trust, no taxes are due on the realized gain. This allows the trustee of the Charitable Remainder Trust to invest sale proceeds, undiminished by taxes, and to provide an opportunity for a larger income stream to the income beneficiaries of the trust. Using a combination of investment techniques and sale of low yielding but appreciated assets can result in substantially more spendable income for the income beneficiaries than was generated prior to the creation of the Charitable Remainder Trust.

Since the Charitable Remainder Trust is tax exempt, the investment income in gains realized in your trust which are not used for payments to life time beneficiaries are not subject to income tax. Over time, this can substantially increase the growth of the investment trust portfolio, especially when compared with similar performance on an after tax basis.

The Charitable Remainder Trust may be an appropriate tool when taking into account your asset mix, the capital gains tax liability, your wish to benefit charity, and your income needs.

Return to Top


btm logo

17415 S. Monterey Street, #204   •   Morgan Hill, CA     408.779.5101