Income for life
A Charitable Remainder Unitrust provides a way to obtain
an income for life which can grow as the funds invested in
the trust grow. The unitrust provides a variable payment,
based upon a fixed rate multiplied by the current value of
the assets in the trust at the beginning of each year. If
trust assets grow, the increasing value of the trust portfolio
will result in larger annual payouts. A gift of cash or appreciated
property (e.g., stocks or real estate) is used to set
up the trust either during a donor's lifetime or through his
or her will. This trust agreement fixes a unitrust rate, and
donors or their designated beneficiaries receive regular payments
of income for life or joint lives, or for a period of time
not to exceed 20 years.
Tax benefits
When the donor contributes appreciated property to fund the
trust, he or she avoids any initial tax on the capital gain.
The contributed property is received by the trust at its fair
market value, and the unitrust rate is multiplied by this
value to calculate the initial periodic payment to the income
beneficiaries. In addition, your client is entitled to a current
income tax charitable deduction based on the present value
of the anticipated remainder.
Example:
Stock worth $20,000, which costs your client $5,000, is contributed
to a Charitable Remainder Unitrust, which then disposes of
the stock and reinvests the proceeds. The trust is credited
with the full value of the stock and neither the donor nor
the trust is charged initially with income tax on the capital
gain. The trust provides income for life at a unitrust rate
of, for example 7%, providing you with payments of $1,400
the first year ($20,000 x 7%).
Thereafter, the value of the securities is established on
the first business day of each calendar year, and the unitrust
rate is applied to this new value to establish the payment
for the current year. If for example, the trust assets had
increased in value to $25,000, the payment for the year would
be $1,750 ($25,000 x 7%).
It must be noted that in periods of investment loss, the
value of the trust will be reduced and the payments to the
beneficiary will be lower. However, over long periods of time
investments in securities have tended to increase in value.
Donors wishing a fixed payout can consider a Charitable Remainder
Annuity Trust which provides that benefit.
At a glance:
- Provides lifetime income at favorable rates
- Eliminates initial tax on capital gain for contributed
appreciated property
- Provides current income tax charitable deduction
- Enables your client to avoid estate taxes on contributed
assets
- Allows your client to make a significant contribution
to the Jewish community
More...
>>
Get a complete legal and tax overview of unitrusts and other
deferred gifts in GiftLaw Pro under "Chapter 3—Deferred
Gifts".
>> Do a calculation
of the potential tax benefits of establishing a charitable
remainder unitrust
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