You would like to establish a trust fund that will provide $20,000 a year forever for your heirs. The trust fund is going to be invested very conservatively so the expected rate of return is only 5%. How much money must you deposit today to fund this gift for your heirs?

Question

Quizplus · Accepted Answer

To find out how much money must be deposited today to fund a perpetual gift of $20,000 a year at a 5% rate of return, you use the formula for the present value of a perpetuity: PV = PMT / i, where PV is the present value (the amount of money you need to deposit today), PMT is the annual payment ($20,000), and i is the annual interest rate (5% or 0.05). Plugging in the numbers: PV = $20,000 / 0.05 = $400,000.

You Would Like to Establish a Trust Fund That Will