The Laguna Playhouse

Example of a Charitable Remainder Unitrust

This is an educational illustration and does not represent legal or tax advice.
Please consult your legal and tax advisors about your specific situation.

Mary and John Smith, both 70 years old, have a condominium they purchased a number of years ago. Initially they used it as a vacation home, but as they have gotten older and their children moved away from home and from the area, it gradually became an investment property. It is now fully depreciated and provides a return of about 4 percent after expenses.

Condominium Value
Value: Cost: Gain:	$100,000 $20,000 $80,000

At 70 years old they wish to avoid working with tenants and repairs to the condo. The Smiths have considered selling, but they have been slowed down by circumstances: Whom would they consider as the real estate agent? What about the necessary cleanup? What if they do not want to pay capital gain tax (15 percent) or the recapture of depreciation tax (25 percent)?

Mary recently spoke with a friend who not long ago had been in a similar situation. She suggested talking with an attorney about donating the property since she knew the Smiths were very involved with several non-profit organizations. After meeting with a development officer, the Smiths sat with an attorney who suggested a Charitable Remainder Trust.

In their tax bracket, they could place the property in a charitable remainder trust that would sell the property and invest the proceeds in other investments without having to pay capital gain tax. The Smiths would receive an income for life based on a percentage of the assets in the trust. The trust would be revalued every year, and if the assets increase, their income would rise as well. After their lives, the remainder in the trust would go to the non-profit organization of their choice.

The attorney ran some numbers and suggested that the Smiths take a 5 percent payout from the trust ($5,000 the first year as opposed to the $4,000 they are currently earning). The attorney estimated that the trust could earn 7 percent and would continue to pay the Smiths 5 percent each year of the value of the assets in the trust.

Unitrust
First Year Income: Total Estim. Income: Tax Savings:	$5,000 $133,053 $38,559

At their deaths, the remainder in the trust would pass without taxes or probate to the non-profit organization they choose. Based on assumptions and his calculations, the non-profit organization would receive $149,729 in about 21.8 years. It would increase from the initial $100,000 because it was earning more than it was paying to the Smiths.

Furthermore, the Smiths would be able to take a current year charitable tax
deduction of $29,179.35 with a total tax saving (including capital gains tax) of $38,559. In addition, they could look forward (again, based on assumptions and current rates) to a total income of $133,053** over their estimated lifetime.

Knowing that the trust would mean a wonderful thing for their non-profit organization and that they would have higher income and fewer worries without the property itself, the Smiths decided to follow the attorney's suggestion.

Example assumes a 4.6 percent applicable federal rate.

** Assumptions are the trust earns 7 percent with the difference between the 5 percent payout and the 7 percent earnings reinvested in the trust each year.

Please note, individual financial circumstances will vary. These calculations are estimates of gift benefits. The information on this site does not constitute legal or tax advice. Donor stories are for purposes of illustration only. As with all tax and estate planning, please consult your attorney or estate specialist. All material is copyrighted and is for viewing purposes only. Use of this site signifies your agreement with the terms of use. The content in this Planned Giving section has been developed by Future Focus. Please report any problems to webmaster. Revised: March 28, 2006 1:07 .