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Charitable Remainder Unitrusts
A Charitable Remainder Unitrust is for you if...
- You're considering a lifetime gift in partnership with Children's Hospital.
- Your planning objective is increased income.
- Your preference is a variable income payout.
- You want to retain flexibility in the management of your gift.
About Charitable Remainder Unitrusts
The charitable remainder unitrust is the most flexible gift plan available. The unitrust addresses multiple financial and family needs, unlocking your ability to make a significant gift to Children's.
The unitrust is an individually managed trust paying its beneficiaries – you, your spouse, family members, or other individuals – income as a fixed percentage of the value of its principal, which is revalued annually. Income in excess of that unitrust amount is reinvested to maintain principal and allow for growth.
Here's how a unitrust can be a planning tool for you:
- Income can be paid for the lifetimes of the beneficiaries, or for a term of up to 20 years.
- If you fund a unitrust with appreciated securities or property, no upfront capital gains tax is payable. You can contribute appreciated but low-yielding assets and put the entire value of your gift to work generating higher income for you.
- Similarly, no capital gains tax is applied to the growth of a unitrust's principal. We offer a version of the unitrust – explained in more detail below – that maximizes growth for a term, then reinvests the appreciated principal in income investments with no reduction for capital gains tax.
- Besides avoiding capital gains tax, you also receive a charitable deduction when you create a unitrust. Your deduction will be based on the full fair market value of the assets you contribute, reduced by the present value of the assets you retained. We can generate this deduction amount for your planning purposes.
- When your unitrust terminates – at the death of the last beneficiary or at the end of the trust term – the remaining balance will be available to Children's for the use you designated when you created the trust.
Grow Your Gift, and Your Income
The unitrust is designed to pay you income as a fixed percentage of gradually increasing principal. We offer an alternative version designed to hold a temporarily illiquid asset or a portfolio of growth securities for a period of time, while it pays the beneficiaries the lesser of the unitrust amount or the trust's actual net income.
Net-Income Unitrust
Called a net-income unitrust, this option is especially useful to donors who want to make a gift and secure a tax deduction now but who don't need income back immediately.
A net-income unitrust can continue in that format for its entire term, or it can make up the accrued difference between actual income payments and the unitrust amount in years when it earns surplus income. An attractive option is the flip unitrust, which changes from an income-only payout to a fixed-percentage distribution when a pre-arranged event occurs – such as the beneficiary turning 65 or the building in the unitrust being sold.
A net-income unitrust can change its investments to income instruments with no capital gains liability. Therefore, it is an attractive tool for younger donors to build a supplementary retirement or tuition fund that will grow tax-free, then distribute income when they and their family need it most.
We can assist you and your advisors in considering the alternative of a net-income unitrust.
Example
You're considering a gift to Children's of $250,000, but you're concerned about the capital gains consequences of liquidating assets, and about reducing your and your spouse's cash flow. Indeed, you're looking for increased income, since you're committed to helping with your grandchildren's tuition.
Your portfolio contains a small commercial building that has grown in value and which has generated several offers to purchase. You decide to place the building into a net-income unitrust which will pay lifetime income (initially the rental income from the building, then a percentage of the proceeds of its sale) to the two of you. The remainder of the unitrust will go to Children's.
What are your benefits?
Donors: Husband and Wife, 70 and 68
Asset contributed: Office building
Amount contributed: Fair market value $250,000
Cost basis: $125,000
| Comparison | Unitrust | Private Sale |
|---|---|---|
| Amount transferred | $250,000 | $250,000 |
| Capital Gains Tax (@15%) | 0 | $18,750 |
| Net for reinvestment | $250,000 | $231,250 |
| Income rate | 5% | 5% |
| First year's income | $12,500 | $11,562 |
| Charitable deduction | $101,328 | 0 |
| Tax savings @ 35% rate | $35,467 | 0 |
| Total benefit, first year | $47,965* | $11,562 |
* Unitrust payment plus tax savings from charitable deduction
This example is based on a factor that changes monthly. Contact our office for a personal illustration based on the latest rates.
Note: The Unitrust is not the only gift plan that pays you lifetime income. Compare its benefits with those of the annuity trust and the unitrust.
How Do You Create a Charitable Remainder Unitrust?
Setting up a charitable remainder unitrust is not particularly difficult, but you should be advised by an attorney with expertise in the area of charitable trusts and estate planning.
To save you time and expense, we can provide you with an initial draft of the unitrust agreement for review by you and your attorney. Once your trust agreement is signed, you can "fund" your unitrust by transferring assets to your trustee.
For More Information
Complete the personal illustration form or contact us so that we can assist you through every step of the process.
This is not professional tax or legal advice. Donors must consult their tax and legal advisors regarding their specific situation.