A charitable remainder unitrust can help you maintain or increase your income while making a significant gift to Georgetown Day School.
If your unitrust grows, your payments will grow too, providing a hedge against inflation. Conversely, if your unitrust value decreases over time, so will your payments.
A charitable remainder unitrust could be right for you if:
- You want to maintain or increase your income.
- You want to provide income for yourself or others.
- You want the possibility of income growth.
- You itemize your deductions and want so save income or capital gains taxes.
- You want to make a generous gift to GDS.
- You are considering a gift amount of $100,000 or more.
Separate trust
A charitable remainder unitrust is a tax-exempt trust governed by a trust agreement. You choose the trustee who is responsible for administering the unitrust and guiding the investment of its assets. Georgetown Day School may also act as trustee.
Irrevocable gift
A charitable remainder unitrust is an irrevocable arrangement. Once you transfer assets to the trust, you cannot change your mind and get the assets back. This requirement ensures that whatever value remains when it ends will be used to support GDS.
Payments vary with value of unitrust
Each year, your unitrust will distribute a fixed percentage of its current value, as revalued annually. If your unitrust's value goes up from one year to the next, its payments will increase proportionally. Likewise, if your unitrust's value goes down, its payments will also go down.
Remaining assets to Georgetown Day School
When your unitrust ends, all of its remaining principal will become available to support GDS.
You choose the payment percentage
You choose the percentage of your unitrust’s value that it must pay each year to its income beneficiaries. The payment percentage must be at least 5%. It may be to your advantage to choose a relatively low payment percentage so that the trust’s assets have the best chance to grow. If the value of your unitrust grows, so will its payments. A payment rate of 5% to 6% is typical. Payments are made in annual, semiannual, or quarterly installments.
Payment flexibility
You can include special payment provisions in your unitrust that make it a good way to give debt-free real estate or other illiquid assets that may take time to sell. In this situation, you can limit your unitrust's payments to its net income or its unitrust percentage, whichever is less. This way, the trustee can take the time necessary to sell the assets at a fair price. If the unitrust's net income is less than its unitrust percentage during this time, then it will distribute its net income only. This "net income" limitation can last for the entire term of your unitrust or just until a specific event occurs, such as the sale of the gift asset.
Who can receive payments?
You decide who will receive payments from your unitrust. Usually, this will be you, or you and your spouse. You can, however, select other people to receive payments. For example, you may wish to provide income for parents, a sibling, or children.
How long do payments last?
While most unitrusts last for one or two lives, other terms are possible. A unitrust can last for more than two lives, for a specific length of time of up to 20 years, or for a combination of lives and years.
Tax benefits
- Earn an income tax charitable deduction.
- Avoid capital gains tax.
- May reduce estate taxes and probate costs.
You will receive an income tax charitable deduction in the year of your gift. If you cannot use the entire deduction in the year of the gift, you may carry forward your unused deduction for up to five additional years. If you give appreciated securities to fund your unitrust, you will not pay any capital gains tax when you make your gift.
If you donate appreciated assets to fund your unitrust, you will not pay any capital gains tax when you make your gift. In addition, because a unitrust is tax-exempt, it will not pay any capital gains tax when it sells these assets. This means that your trustee will be able to reinvest the full value of the assets you donate. By removing the gift assets from your estate, you may also reduce estate taxes if your estate exceeds the estate tax credit. You may also reduce probate costs when your estate is settled.
Taxation of payments
The taxation of unitrust payments depends on the trust’s past distributions and investment performance. Payments are typically taxed as ordinary income. If the trust is funded with appreciated assets, a portion of the payments could be taxed at lower capital gains tax rates in some years. It is possible for a portion of the payments to be tax-free in years when there is not enough ordinary income and capital gain income to make the payments.
Add funds anytime
You can make additional gifts to your unitrust at any time. Additions generate an additional income tax charitable deduction that may save you income taxes if you itemize. You will also increase future payments without the effort and expense of creating a new unitrust.
Assets to consider giving
The following are excellent assets to fund your charitable remainder unitrust:
- Cash that you currently have in a savings account, bank CD, money-market fund, or other safe but low-yielding investment.
- Securities, especially highly-appreciated securities.
- Real estate that is debt-free, closely-held stock, and other assets that may take time to sell.
Example
Pam Dawson is 76 years old and her husband John is 75. Pam and John are Georgetown Day School alumni. Many of the stocks in their portfolio have appreciated substantially in value over the many years the Dawsons have owned them. They are enthusiastic about making a major gift to support Georgetown Day School, but they also would welcome a way to receive greater income from their investments without paying a big capital gains tax.
After consulting with their advisor, the Dawsons find that a 5% charitable remainder unitrust funded with $500,000 in assets will meet their needs. They fund their unitrust with $400,000 in stocks plus $100,000 from a money market fund. They paid a total of $75,000 for the stocks, which currently produce about 2% in dividends each year. Their money market fund has been earning about 2% interest annually.
Benefits
- The Dawsons will receive $25,000 in payments in the first year of their unitrust, significantly increasing the income they had been receiving from these assets. If the income and appreciation of the trust's investments, net of costs and fees, total 7% annually, their payments will grow to over $33,647/annually* in 16 years.
- The Dawsons will receive an income tax charitable deduction of about $240,960**.
- The trustee will be able to sell their stock immediately in order to diversify their unitrust's investments without paying any capital gains tax.
- Assuming the investments earn a 7% net annual return, over $686,393* will be left in the Dawsons' unitrust to support Georgetown Day School when their unitrust terminates.
*The future payment amounts and principal amount remaining for Georgetown Day School will be lower if the Dawsons' unitrust earns less than 7% annually.
**The Dawsons' income tax charitable deduction will vary slightly depending on the timing of their gift.