You can take care of yourself and take care of our organization with a charitable remainder unitrust. In this arrangement, you irrevocably transfer assets to a trustee that invests the trust’s assets and pays you and other beneficiaries variable annual payments for life and a term of years.
A unitrust is an excellent vehicle for gifts of appreciated stock or property because the trust is tax-exempt and does not pay capital gains tax when it sells the assets. The entire sales proceeds remain in the trust to provide a payout to the income beneficiaries. The payout amount for the income beneficiaries will depend on whether the charitable remainder unitrust is set up as a standard unitrust, net income unitrust, or flip unitrust (see below). The payout distributed is generally taxable to the income beneficiaries. Upon establishing a charitable remainder unitrust, you are entitled to a current income tax deduction for a portion of the value of the gift transferred to the trust, which is often between 30 and 60 percent of the value of the assets transferred. Our organization serves as a trustee of many charitable remainder unitrusts.
Benefits
- Variable income, based on a percentage of the fair market value of the trust assets, revalued each year
- Federal, and possible state, income tax charitable deduction
- Pay no immediate capital gains tax on the transfer of appreciated assets
- Reduce or eliminate estate taxes
- Diversify your investments
- Make a gift to our organization
This might interest you if…
You want to make a gift to our organization and you:
- Want to receive an income for life, based on a percentage of the fair market value of the trust investments, revalued each year
- Have assets that you are able to give away. Assets that work especially well include:
- Cash or funds earning low interest rates
- Appreciated securities
- Appreciated real estate, including a vacation home or investment property
- Your personal residence if you are planning a move
- Have a large part of your portfolio in one company and want to diversify your investments
- Would like to have a charitable remainder unitrust managed by our organization
- Want to reduce your current income taxes with an income tax charitable deduction
Our organization as trustee
When you establish a charitable remainder unitrust, you will select who will be the trustee of the trust. Our organization is willing and qualified to serve as a trustee if specific requirements are met. The minimum funding amount to establish a charitable remainder unitrust with our organization as trustee is at least $100,000. The actual minimum is determined based on the trust term and the payout rate.
Investing your unitrust
When our organization serves as a trustee of a unitrust, there are various options for how the trust can be invested, including an option that the funds may be invested with our organization. For information about the investment options for charitable remainder unitrusts for which our organization serves as trustee, please contact us.
Assets used
Cash, securities, real estate, or other assets.
Contact us
If you are interested in learning more about creating a unitrust, don’t hesitate to contact us. We would be happy to provide you with information about how a charitable remainder unitrust would work for you based on your circumstances.
Those considering a planned gift should consult their own legal and tax advisors. The Office of Planned Giving staff is happy to speak with advisors.
Types of Charitable Remainder Unitrusts
You can name yourself and other beneficiaries to receive income for life or a term of up to 20 years. There are three types of unitrusts: a standard unitrust, a net income unitrust, and a combination of “flip” unitrust. The income from each trust will vary from year to year, and the right choice will depend on your goals.
Standard unitrusts are the most common type of unitrust. They provide an income based on a fixed percentage (“the unitrust percentage”) determined when the trust is created. The unitrust percentage must be at least five percent multiplied by the fair market value of the trust assets at the beginning of each year to determine the annual payout to the income beneficiaries. If the trust investments grow beyond the amount paid to the income beneficiaries, the annual distributions will increase. However, it is essential to know that if the trust investments do not produce sufficient investment returns in any given year, the annual distribution for the following year will decline. A standard unitrust provides the most flexible investment options and is usually invested for a maximum return.
EXAMPLE:
Carl Smith, age 65, owns stock with a current market value of $200,000, which he bought some years ago for $20,000. It is paying a small dividend of about 1 percent.
Carl would like to sell the stock, but he would have to pay a federal capital gains tax of $27,000. He is in the 35 percent federal income tax bracket for ordinary income and the 15 percent bracket for long-term capital gains.
By transferring the stock to a 5 percent unitrust, he receives an income of 5 percent of the fair market value of the trust assets, revalued annually, for life ($10,000 in the first year, a significant increase from the previous stock dividend). In addition, he receives a charitable income tax deduction of about $89,000 (based on an IRS discount rate of 0.6 percent). This saves him about $31,150 in federal income tax, and he avoids paying the capital gains tax now that would have been assessed if he had sold the stock.
After Carls’s lifetime, our organization will use the assets according to his wishes to create an endowed scholarship fund in his name.
Net income unitrusts provide annual payments in two amounts: 1) the fixed percentage (the unitrust percentage) of the trust’s annual value described above, or 2) the net income of the trust. Younger donors who are not seeking large payments immediately but want to build a fund for potentially higher payments in the future may find this appealing. Initially, a net income unitrust can be invested in assets that produce little interest or dividend income. When income beneficiaries want a higher income, the investments can be changed to produce a higher income.
EXAMPLE:
Louise and Aiden Jordan, both age 50, own stock worth $500,000, for which they paid $50,000 many years ago, which they would like to sell.
To do so would incur a federal capital gains tax of $67,500. They are not interested in receiving much income now, but they may need it later. They are in the 35 percent federal income tax bracket for ordinary income and the 15 percent bracket for long-term capital gains.
They transfer the stock to a five percent to a net income unitrust. Their charitable contribution deduction of about $86,000 (based on an IRS discount rate of .6 percent) gives them an immediate federal income tax savings of roughly $30,100. They avoid paying the $67,500 federal capital gains tax now.
The trust assets can be invested for capital growth and low income until the Jordan’s need income. Later, when the couple wants more income (for example, after retirement), the trust assets can be invested for higher income, resulting in a greater payout.
After their lifetime, our organization will use the trust assets according to their wishes to create an endowed fund for cancer research.
A combination or “flip” unitrust is a good option when an illiquid, non-income-producing asset, such as real estate or closely-held stock, is being used to fund a charitable remainder unitrust. The trust agreement for the flip trust provides that the trust begins as a net income unitrust, paying only any actual earnings (for example, rents from real estate) to the income beneficiaries. The trust agreement further provides that at a date in the future, such as on the date of the sale of assets used to fund the trust, the trust “flips” to a standard unitrust. As of January 1, after the flip date, the unitrust pays the income beneficiaries the unitrust percentage multiplied by the fair market value of the trust assets, revalued each year. A flip unitrust may also be a good option if you wish to plan for retirement because the flip date could be set for a date when you expect to retire.
Example:
Rick Jespersen, a widower age 90, owns a vacation home he inherited more than 30 years ago when valued at $500,000. Since then, he has used it as an investment property, frequently renting it out.
No one else in Rick’s family is interested in taking over property management. It has appreciated enormously in value and is now worth around $5,000,000. It would generate around $870,000 in capital gains taxes if it were sold. He gives it to our organization through a six percent unitrust, naming himself the primary beneficiary and his only child, Gretta, age 65, as the successor beneficiary. The trust agreement provides that a sale of the property triggers the He makes the gift establishing the unitrust in December, which allows him to claim a substantial income tax deduction for that year.
In its role as trustee, our organization cannot sell the property until the following August. The property is rented out twice in the interim, and the income generated (net of expenses) is paid to Rick. Beginning the following January 1, the trust will begin making regular six percent payments to Rick and then, after his death, to his daughter. Upon Gretta’s death, the trust will end, and our organization will use the remaining assets to endow a fellowship fund in the names of Rick and his late wife.