Charitable Remainder Unitrust
If you want to increase your income, lower your taxes, and create a charitable legacy, you can pull off this estate planning "hat trick" by setting up a Charitable Remainder Unitrust (CRUT).
Under a CRUT, you commit to passing assets to a charity, but give yourself the flexibility to earn income from the donated assets while you're still living.
The major goal of a CRUT is to sell a highly appreciated asset without paying capital gains taxes on the profits. But along with the tax savings on capital gains, a CRUT delivers other benefits, such as boosting income and diversifying portfolios. Moreover, a charitable deduction provides immediate income tax savings.
The owner of the appreciated asset is the "donor." The charity to which the donor wishes to gift the asset is called the "charitable beneficiary." The charitable beneficiary must always be an IRS-approved charity.
The "trustee" of the CRUT can be the donor, a charity, an independent trust company or another person designated by the donor. Anyone who receives income from the asset under the terms of the CRUT is called an "income beneficiary." Donors can be income beneficiaries.
The trust must name the trustee, the charitable beneficiary, the percentage to be paid to income beneficiaries and the term of the trust. The trust must also specify the annual percentage to be paid out to the donor. This amount must be between 5% and 50%. The percentage calculated must also provide for a minimum charitable deduction of 10% of the amount transferred to the CRUT.
Prior to any sale, the donor transfers the asset or assets into the trust. Any type of asset can be contributed to a CRUT: stocks, bonds, real estate, collectibles, etc. Then, the trustee, who also can be the donor, sells the asset, reinvesting the proceeds in any financial instrument deemed appropriate.
The trust's term can extend for the life of the donor, or for the life of the donor and another individual, typically a spouse. The term's parameters also can be set according to years, up to 20 years.
The trustee continues to manage the trust throughout its term, making investment choices and distributions to the income beneficiaries. Upon the death of the income beneficiaries, or upon reaching the term's preset time limitation, all the funds remaining in the trust are disbursed to the charitable beneficiary.
The tax-savings are significant and two-fold: 1) an immediate income tax deduction for the present value of the future gift, and 2) no capital gains taxes.
Pick the type of trust that works best for your situation. Also consult a broker, who should be able to tailor the right plan for you. Charles Schwab, TD Ameritrade and T. Rowe Price all provide estate planning services.
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