This is similar to the proposal you will receive by filling out our free proposal form. You can use this to show your clients the benefits they will receive by establishing a Charitable Remainder Trust. This is just one example of the many services YTA will provide for you.
Two Lives Unitrust
and Mary Jones
An Educational Service Provided By
Yellowstone Trust Administration, Inc.
1. Give asset, sell tax-free in trust. Bypass $80,000 gain may save $22, 400. Income tax deduction of $36,136 may save $10,118.
2. UT annual income $8,000. Increased income $6,000 over prior $2,000 income. Estimated income of 16.5 years $142,753. Effective pretax rate 8.90%
3. If trust earns 9%, pays 8%, then grows by 1%. After two lives, trust passes without probate to charity.
The Charitable Remainder Unitrust is a special trust that pays income to family members. After all of the income payments have been completed, the remainder is distributed to qualified charities. The person who establishes the trust may select the unitrust percentage, the persons to receive the income from the trust, and the charities which will receive the principal of the trust after all income payments are completed. The major benefits of the trust are (i) Bypass of capital gains tax, (ii) Increased income and (iii) a charitable income tax deduction.
Bypass Capital Gains
Investments of property eventually mature. After a very good investment has appreciated, the yield on that investment may then be quite low. At certain times, it is wise to sell a property and reinvest the proceeds in a new property for maximum investment gain. The unitrust is an ideal method for a tax-free reinvestment, since the qualified unitrust bypasses the capital gains tax. The full amount received from the sale will then be reinvested.
Mature investment properties frequently are earning two, three or four percent per year. The capital gains tax-free reinvestment through the unitrust might enable a person to sell without tax, an asset earning a low rate of return and reinvest in an asset earning a higher rate of return. The increased earning can than be passed on to the income recipients using the unitrust income produced by higher yield investments. Over the years, family members can reinvest the additional income and acquire even greater economic security.
Income Tax Deduction
After the completion of all income payments, the principal or corpus is distributed to charity. Even though charity might not receive anything for many years, the government permits the trust grantor (the person who established the irrevocable trust) to take an immediate income tax deduction. The deduction is a percentage of the value of the property transferred to the trust and is calculated using the ages of the donors and the unitrust percentage selected. Many trust donors use their current tax savings for additional investments and thus are able to enjoy the maximum return from their charitable trust payments and also benefit at the same time from substantial income tax savings.
Each grantor may select the unitrust percentage. The unitrust percentage may amount to five percent or more of the value of the trust. Each year the trust accountant determines the fair market value of the trust. The unitrust then pays the selected percent of the fair market value to the family. For instance, if the trust is valued at $100,000 and the trust grantor selected a 6% unitrust percentage, the accountant would multiply the 6% times the $100,000 in value and distribute $6,000 that year. If earnings were 7 % or 8% and the trust distributed 6%, the extra 1% or 2% would be added to the principal. Since the income payments depend upon the value in the trust, many persons select lower percentages and then hope to benefit from the growth of the trust value during the later years of the trust.
Duration of Income
In addition, the trust grantor may also select the time for which payments are to be made. This time may be one life, two or more lives, or a term of one to twenty years. The current illustration shows a trust which pays income for two lives. After the income recipients have passed away, the trust corpus will then be distributed to charity.
Finally, the trust grantor may select the charities that will receive the trust remainder (the corpus of the trust after all income payments are completed). The entire corpus could be distributed to one charity, or the corpus may be divided among several charities. The selection of the charities is entirely under the control of the trust grantor.
Each unitrust must have a trustee. The trustee can be a commercial institution such as a bank or trust company, a charity, an individual or a combination of two of these three options. The trustee will have to invest the property, conduct any sales and file the appropriate information and tax forms. Since the trust may last for many years, it is important to select a trustee in whom the donor has confidence.