A Charitable Remainder Unitrust for a Troublesome Asset

A Charitable Remainder Unitrust for a Troublesome Asset

A Presentation Case Study
Case study posted in on 27 September 2006| comments
audience: National Publication | last updated: 20 May 2014


Walter and Helen Wilson are in their early 70s and hold a highly appreciated, low yielding stock they are no comfortable owning. In this presentation case study, the Wilson's attorney shows them how they can use a charitable remainder unitrust to sell the stock without tax, receive an additional charitable income tax deduction, receive a life income, and donate the remainder to the charity of their choice.

The Facts:

When Walter and Helen Wilson told their attorney, Frank Lee, they had a "troublesome asset" he didn't know what to expect. Walter (age 74) and Helen (age 72) had just celebrated 52 year of marriage. It was a good marriage, but no children. They both had a career. That's where the troublesome asset story started. Helen had worked for a major tobacco company. During her time there, she acquired 3,468 shares of company stock with a zero cost basis. The dividend was small and the capital gain on the shares was great.

The Challenge:

troublesome-crt-1Over the years Helen had become convinced that tobacco was harmful, and even though the company had diversified, she wanted to get rid of the stock. "If we sell the stock," Walter said, "then we will have capital gains taxes to pay." Helen told their attorney that every time a dividend was received she felt guilty. "I want to get rid of the stock but I don't want to pay capital gains tax. It's troublesome, but what can I do?"

The Solution:

Attorney Lee knew what to suggest. He knew that Helen served as trustee of a fine college and believed in helping students receive scholarships. So he asked the current value of the "troublesome stock" and learned it was worth $151,292.

 troublesome-crt-2"If that troublesome asset with a zero cost basis is sold, all capital gains will be realized and a tax due. But if the asset is placed in a charitable remainder unitrust and sold, no tax is due because the trust is tax-exempt." Walter Wilson smiled as Mr. Lee continued: "The unitrust will pay a selected percent of the trust's value to you each year over both of your lives, then what remains my go to your college to provide scholarships. The payments to you will be taxable and, depending on how the trust is reinvested will usually consist of a combination of ordinary income and capital gains; however, the important thing to keep in mind is that your payments will be based on a principal base undiminished by taxes. In addition, if the trust earns more than the 6% it pays you, these amounts will compound tax free resulting in larger payments to you in future years."

In addition to avoiding capital gains on the sale of your stock, the Wilsons will receive a second income tax benefit. Since a qualified charity will ultimately receive the trust's remainder, a charitable deduction is available for the present value of that future gift. "Wow!" said Helen, "the troublesome stock is gone, there is no capital gains tax to pay, we get a stream of income, and after we're gone my college receives money for scholarships." "And we get a charitable deduction to boot," said Walter. "How fast can we do this," asked Helen?

 troublesome-crt-3Mr. Lee explained how to determine the value of the stock that will fund the unitrust and how the charitable deduction is determined. The Wilsons must also select the trustee, the lifetime payment percentage, and determine how the college will use the trust's remainder. "For example," Lee said, you may wish the unitrust to pay 7.0%" Helen looked at Walter and Walter looked at Mr. Lee. "I am a conservative man, I want a lower percent." Mr. Lee then suggested he run some projections based on a conservative investment return and several different payout rates. Helen and Walter could select the best payout rate for them. "That sounds like a good plan," they replied.

"A trust document that names the trustee, the lifetime payment percent, and the charity that will receive the trust's remainder must be drafted," explained Lee. "But before this, I would like to run some calculations. Then we will meet again and go over the details and make sure that all your questions are answered.

The Result:

Walter and Helen transferred Helen's zero-basis tobacco stock to a 6.0% 2-life unitrust. When the stock with a fair market value of $151,292 was placed in the unitrust and sold all capital gains were deferred. The available contribution deduction was $61,659. Over the Wilson's 19.3 year life expectancy it was estimated that they would receive $173,048 in unitrust payments. Assuming the trust earned averaged at least 6%, the college would receive over $150,000 for a scholarship in the Wilson's name.

troublesome asset 4

That's how the Wilsons turned a "troublesome asset" into a good thing — a very good thing, indeed!

Composer InteractiveCopyright © 2006 Composer Interactive, LLC and Planned Giving Design Center, LLC. All rights reserved.

This presentation is provided courtesy of Composer Systems, LLC using Composer Interactive Presentation Systems and is provided for educational purposes only. Persons making gifts to charity should review their plans with their own professional advisors. Individuals named in this case study are fictional with any relationship to real persons coincidental.

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Taxes on the CRUT

You write above, "The payments to you will be taxable and, depending on how the trust is reinvested will usually consist of a combination of ordinary income and capital gains". How does this work? I understand the payments are taxable, but how do you determine what is taxed at ordinary income rates vs. cap gains? Why/how does how the trust is "reinvested" affect this? Thanks

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