Charitable Family Trusts

A charitable family trust is a trust meant to lower the donor's total taxable estate by leaving assets in the trust that benefits the charitable family trust upon death of the donor. There are two main charitable trusts including: charitable remainder trusts; and pooled income funds.

Charitable Remainder Trusts

A charitable remainder trust can be in the form of a charitable remainder annuity trust (CRAT). The "CRAT" provides a fixed annuity to the donor between five percent and 50 percent of the property contained in the body of the trust. The annuity pays at least once per year to the donor. The annuity must be a life annuity until death or an annuity certain for no more than twenty years. The remainder interest is paid to charities of choice. Additionally, a trustee can distribute payments to income beneficiaries as officiated by the so-called "sprinkling provision".

Another charitable family trust can be in the form of a charitable remainder unitrust (CRUT). The "CRUT" is more flexible than a CRAT. The annual annuity rules apply to CRUTs exactly as they apply to CRATs. As opposed to the CRAT, CRUT annuity payments can be limited to the income that the trust earns. Also contrary to the CRAT, the CRUT may pay additional contributions after the trust has been established. The sprinkling provision common with other charitable remainder trusts applies the same way for CRUTs.

Pooled Income Funds

Pooled income funds are like mutual funds for charity trusts. Donor contributions are pooled and in return they receive an ownership allocated percentage of the income for the life of the trust. These pooled funds are not allowed to invest in tax exempt securities such as certain municipal bonds. Just like charitable remainder trusts the donor receives an income tax deduction for the remainder interest in the trust. These pooled income funds are advantageous for small donors because they can gift remainder interests for charities and properties without having to create an individual annuity trust. Also, just like mutual funds, the pooled income funds receive the benefits of diversification and protection with less of the costs.

Then there are charitable lead trusts. These are created to lower the estate's taxable estate. The beneficiaries will most likely have a lower gift tax to pay. The tax deduction will be equal to the annual charitable gifting the trust makes.

What is a qualified dividend?

A qualified dividend is one in where capital gains taxes can be applied. Normally, a qualified dividend garners dividends that pass through an investment vehicle. The most basic difference between qualified and ordinary dividends has to do with taxes. Ordinary dividends are taxed at the income tax rate the investor is paying. Qualified dividends, on the other hand, are taxed at a lower capital gains tax rate. Most dividends that are paid out by investment companies and stocks are treated as qualified dividends.

Options backspread

An options backspread is a ratio strategy with call or put options. Either the long or short side will have more weight. For instance, a call ratio backspread could be to sell the lower strike price and purchase a greater number of higher strike price calls. This gives an unlimited profit potential with a limited risk. This is a bullish strategy that will receive its profit potential with a great upside move. The upside move must be bigger to experience its profit potential depending on the gap between the purchased and written calls.

The backspread can be a ratio of puts as well as calls. Normally, the ratio is between 2:1 and 3:1. This means for every short position put on the long side there will be two to three times the amount of short positions.

The backspread is an ideal strategy for a bullish investor who predicts a very large move to be imminent. As opposed to a bull call spread or a bear put spread, this backspread can experience its profit potential earlier and more abundantly. Be certain whenever you try the backspread that you never collect a net credit or else your position is an inverted ratio backspread, which has unlimited risk.

S&P 500 mini futures

The S&P 500 mini is a highly followed and traded futures product. Because it is a mini futures contract, it is popular among smaller traders who cannot afford the risk of the full futures contract. It is also popular among bigger traders who want more flexibility by being able to purchase more contracts.

The Mini Contract

Mini contracts are similar to full futures contracts; however, they are worth a fifth of the value of the contract. Therefore, mini futures contracts have 20 percent of the profit and loss point value. In other words, buying five minis is the same as buying one full contact.

For every point the S&P 500 goes up or down, the contract will gain or lose $50 as opposed to $250 for the full contract. The margin requirements are as follows. For the E-mini S&P 500, the margin requirement to trade a single contract is $5,625. As for the full S&P 500 contract, the margin requirement to trade is $28,125. Notice that the margin requirement for the full contract is five times that of the mini (28,125/5,625=5).

The Risk

When you do the math and track the movements of the market on a daily basis, you are looking at a potentially very dangerous and risky trading vehicle. Just one full S&P 500 futures contract can swing, in terms of profit and loss, very easily, $2,500 a day, if not within the hour.

That's not all because futures contracts need to maintain a certain margin in the account at all times. If not, the account will have to be supplemented with additional money to make it whole to at least the level of the maintenance margin. The maintenance margin level for the E-mini S&P 500 is $4,500.

To understand, take, for example, the recent market collapse the second week of May 2010. That week is considered to have contained one of the most volatile trading days in market history. In one day, the index lost 36 points from open to close. That equates to a loss of just over 3%. That's not the end of the world, right? Well, imagine how that would fare in someone's future account that is being held on to. A 36-point loss equates to a full $9,000 loss in one day! For the mini, that would be a potential loss of $1,800.

That's not the worst of it because futures contracts are tracked for maintenance margin on an intraday basis. That means if the account started with the minimum initial margin in trading, the mini S&P 500, the account balance would fall to $3,825 by the end of the trading day. If not replenished to $5,625, the account would pay a penalty each week the margin call is not met with additional funds.

It gets riskier yet because, during the intraday, from open to low, the S&P 500 actually lost 99 points. During these hours, nearly an entire mini S&P 500 account would be lost. This kind of situation creates panic and problems of having to keep the margin level up during extreme market conditions.