Charitable Unitrusts
The More You Give - The More You Get

Individuals who are interested in providing substantial financial support to charities will do both their families, and the charities a favor by becoming familiar with the tax subsidies which are available for carefully planned contributions. By educating themselves and taking steps to take advantage of Federal Tax provisions, donors can both increase the size of their contributions to charity and the size of the inheritance of their heirs. One way to accomplish this is to establish a Charitable Remainder Unitrust with your desired charitable contribution, and a Wealth Replacement Trust funded by life insurance purchased with the tax savings.

The Charitable Remainder Unitrust is a vehicle for making a present donation to a charity of a future interest ("the remainder interest") in a currently established trust. The Trust provides the donor and his or her spouse with a lifetime income stream from the assets in the Trust, with the balance of the assets going to a charity after the death of both spouses. The donor benefits at the time of the establishment of the Trust by the immediate tax deduction of the present value of the remainder interest, and by the avoidance of any capital gains tax which would eventually be due on property contributed to the trust with unrealized capital gains. At the same time, the donor succeeds in removing the property from his or her estate resulting in death tax savings as well.

This method is particularly useful for individuals who own highly appreciated property ("low basis property") that produces little or no income which they would like to convert to income producing property and have avoided doing so only because of a desire to avoid the capital gains tax. By contributing such property to a Charitable Remainder Unitrust, the individuals can convert the highly appreciated property into income- producing property without paying the capital gains tax, thereby creating an income stream for themselves while at the same time creating a tax deduction for the value of the remainder interest.

Another advantage to the Charitable Remainder Unitrust is that the donor will benefit from the tax-free reinvestment of moneys in the Trust. The donor selects a "Unitrust percentage" which will determine what percentage of the principal balance in the Trust the donor will be entitled to each year as lifetime beneficiary of the Trust. If the donor selects 7.5%, and the Trust earns interest at 10%, 2.5% may be reinvested tax-free each year. The donor will benefit because his or her 7.5% interest will increase with the growth of the principal.

The final step necessary to take full advantage of the Estate Planning opportunities provided by the Charitable Remainder Unitrust is to use all or part of the tax savings to purchase a life insurance policy with benefits which will replace the value of the property placed in the Trust. The life insurance policy should be held by a Wealth Replacement Trust, that is structured in such a way that the proceeds will not be part of the donor's taxable estate for federal or state death tax purposes. In this way, the donor's heirs will not be deprived in any way by the contribution to the charity. The result is that the donor not only replaces the property that was donated to charity, but replaces it with property that passes to heirs Estate tax free!

There is quite a bit of flexibility in the management of the Charitable Remainder Unitrust. If a donor does not have a present need for income, the Trust assets can be invested in high growth/low yield assets. In the future, if the donor has a need for greater income, the assets may be converted to higher yield items. In those later years when the donor has a greater need for income, the Trust can pay the donor more than the current year Unitrust percentage to make up for the years in which their was not enough available income to m make payments in the amount of the Unitrust percentage.

The following is an example of how this planning technique works:

John and Jane Generous are both age 46, and are in a middle income tax bracket (28%). They decide to contribute $200,000 of stock in which they have a basis of $40,000 to a Charitable Remainder Unitrust. (Had they sold the stock and converted it to income producing property, they would have only had $155,200 of principal remaining due to the capital gains tax of 28%.) John and Jane will be able to take an immediate charitable deduction of $14,816 if they take a 7.5% Unitrust interest in the trust. (calculation based on a 7% Adjusted Federal Rate). With a 7.5% annual income interest, assuming the Trust earns 10% interest, after 22 years the cumulative annual income received from the charitable trust (assuming it is reinvested with a 10% return and taxed at 28%) will be greater than the value John and Jane could have accumulated had they sold the stock and invested the $152,000 at 10% outside of a charitable trust. By the end of 40 years, the Charitable Remainder Unitrust would yield an after-tax accumulation of $3,123,259 versus an after-tax accumulation of $2,336,083 had the property been sold.

If either John or Jane lives 22 years or longer after the Charitable Remainder Unitrust is established, they will have done better than had they sold the stock and invested the net proceeds. To hedge against the possibility that they will not live 22 years, they can purchase a second to die life insurance policy with the initial tax savings. The initial tax savings include the income tax savings of $4,148 resulting from the $14,816 deduction, and $44,800 in capital gains tax for a total savings of $48,948. The $48,948 should be adequate to fund a second to die policy with proceeds that are adequate to replace the $200,000 initial contribution.

As you can see from the above example, a Charitable Remainder Unitrust allows individuals to help charities while helping themselves as well. The following are a few general principles that should be considered in planning for different situations:

• In many cases, the lower the Unitrust rate, the greater the eventual payout will be because the Trust principal will be able to expand more due to the tax free growth opportunity.
• The older the lifetime beneficiary (ies), the greater the present value of the remainder interest, and the greater the amount of the income tax deduction.
• A lower Unitrust rate will increase the present value of the remainder interest and thereby increase the value of the income tax deduction.
• The higher the amount of unrealized capital gain, the higher the capital gains tax savings, and the greater benefits to be attained from establishing a Charitable Remainder Unitrust instead of selling the property in invest in income producing property.