A unitrust is an excellent vehicle for gifts of appreciated stock or property because the trust is tax exempt and does not pay capital gains tax when it sells the assets. The full sales proceeds remain in the trust to provide a payout to the income beneficiaries. The amount of the payout for the income beneficiaries will depend on whether the charitable remainder unitrust is set up as a standard unitrust, net income unitrust, or flip unitrust (see below). The payout distributed is generally taxable to the income beneficiaries. Upon establishing a charitable remainder unitrust, you are entitled to a current income tax deduction for a portion of the value of the gift transferred to the trust, which is often between 30 and 60 percent of the value of the assets transferred. Stanford serves as trustee of many charitable remainder unitrusts.
Variable income, based on a percentage of the fair market value of the trust assets, revalued each year
Federal, and possible state, income tax charitable deduction
Pay no immediate capital gains tax on the transfer of appreciated assets
Reduce or eliminate estate taxes
Diversify your investments
Make a gift to Stanford
This might interest you if...
You want to make a gift to Stanford and you:
Want to receive an income for life, based on a percentage of the fair market value of the trust investments, revalued each year
Have assets that you are able to give away. Assets that work especially well include:
Cash or funds earning low interest rates
Appreciated real estate, including a vacation home or investment property
Your personal residence if you are planning a move
Have a large part of your portfolio in one company and want to diversify your investments
Would like to have a charitable remainder unitrust managed by Stanford
Want to reduce your current income taxes with an income tax charitable deduction
Stanford as trustee
When you establish a charitable remainder unitrust, you will select who will be the trustee of the trust. Stanford is willing and qualified to serve as trustee, if certain requirements are met. The minimum funding amount to establish a charitable remainder unitrust with Stanford as trustee is at least $200,000, with the actual minimum determined based on the term of the trust and the payout rate.
If you would like to learn more about Stanford serving as trustee of a charitable remainder unitrust, please contact us.
Investing your unitrust
When Stanford serves as trustee of a unitrust, there are various options for how the trust can be invested, including an option that the funds may be invested with the Stanford University endowment. For information about the investment options for charitable remainder unitrusts for which Stanford serves as trustee, please contact us.
Cash, securities, real estate, or other assets.
If you are interested in learning more about creating a unitrust, please contact us. We would be happy to provide you with information about how a charitable remainder unitrust would work for you based on your circumstances.
Those considering a planned gift should consult their own legal and tax advisors. The staff in the Office of Planned Giving are happy to speak with advisors as well.
Types of Charitable Remainder Unitrusts
There are three types of unitrusts: a standard unitrust, a net income unitrust, and a combination or “flip” unitrust. The income from each trust will vary from year to year, and the right choice will depend on your goals. You can name yourself and/or other beneficiaries to receive income for life and/or for a term of up to 20 years.
Standard unitrusts are the most common type of unitrust. They provide an income that is based on a fixed percentage (“the unitrust percentage”) determined at the time the trust is created. The unitrust percentage must be at least five percent and is multiplied by the fair market value of the trust assets at the beginning of each year to determine the annual payout to the income beneficiaries. If the trust investments grow beyond the amount paid to the income beneficiaries, the annual distributions will increase. However, it is important to know that if the trust investments do not produce sufficient investment returns in any given year, the annual distribution for the following year will decline. A standard unitrust provides the most flexible investment options and is usually invested for a total maximum return.
Jeremy Smith, age 65, owns stock with a current market value of $200,000, which he bought some years ago for $20,000. It is paying a small dividend of about 1 percent.
Jeremy would like to sell the stock, but he would have to pay federal capital gains tax of $27,000. He is in the 35 percent federal income tax bracket for ordinary income and the 15 percent bracket for long-term capital gains.
By transferring the stock to a 5 percent unitrust, he receives an income of 5 percent of the fair market value of the trust assets, revalued annually, for life ($10,000 in the first year, a significant increase from the previous stock dividend). In addition, he receives a charitable income tax deduction of about $89,000 (based on an IRS discount rate of 0.6 percent). This saves him about $31,150 in federal income tax, and he avoids paying now the capital gains tax that would have been assessed if he had sold the stock.
After Jeremy’s lifetime, Stanford will use the assets according to his wishes to create an endowed scholarship fund in his name.
Net income unitrusts provide annual payments in two amounts: 1) the fixed percentage (the unitrust percentage) of the trust’s annual value described above, or 2) the net income of the trust. Younger donors who are not seeking large payments immediately but want to build a fund for potentially higher payments in the future may find this appealing. A net income unitrust initially can be invested in assets that produce little interest or dividend income. When income beneficiaries want a higher income, the investments can be changed to produce a higher income.
Louise and James George, both age 50, own stock worth $500,000, for which they paid $50,000 many years ago, which they would like to sell.
To do so would incur federal capital gains tax of $67,500. They are not interested in receiving much income now, but they may need it later. They are in the 35 percent federal income tax bracket for ordinary income and the 15 percent bracket for long-term capital gains.
They transfer the stock to a five percent Stanford net income unitrust. Their charitable contribution deduction of about $86,000 (based on an IRS discount rate of .6 percent) gives them an immediate federal income tax savings of roughly $30,100, and they avoid paying now the $67,500 federal capital gains tax.
Until the Georges are in need of income, the trust assets can be invested for capital growth and low income. Later, when the couple would like more income (for example, after retirement), the trust assets can be invested for higher income, resulting in a greater payout to them.
After their lifetime, Stanford will use the trust assets according to their wishes to create an endowed fund for cancer research.
A combination or "flip" unitrust is a good option when an illiquid, non-income producing asset, such as real estate or closely held stock, is being used to fund a charitable remainder unitrust. The trust agreement for the flip trust provides that the trust begins as a net income unitrust, paying only any actual earnings (for example, rents from real estate) to the income beneficiaries. The trust agreement further provides that at a date in the future, such as on the date of the sale of assets used to fund the trust, the trust "flips" to a standard unitrust. As of January 1 after the flip date, the unitrust pays the income beneficiaries the unitrust percentage multiplied by the fair market value of the trust assets, revalued each year. A flip unitrust may also be a good option if you wish to plan for retirement because the flip date could be set for a date when you expect to retire.
Rick Hsu, a widower age 90, owns a vacation home that he inherited more than 30 years ago when it was valued at $500,000. Since then, he has used it as an investment property, frequently renting it out.
It has appreciated enormously in value and is now worth around $5,000,000. If it were sold, it would generate around $870,000 in capital gains taxes. No one else in Rick’s family is interested in taking over management of the property. He gives it to Stanford through a six percent ﬂip unitrust, naming himself as the primary beneficiary and his only child, Alice, age 65, as the successor beneficiary. The trust agreement provides that the ﬂip is triggered by a sale of the property. He makes the gift establishing the unitrust in December, which allows him to claim a substantial income tax deduction for that year.
Stanford, in its role as trustee, is not able to sell the property until the following August. In the interim, the property is rented out twice and the income generated (net of expenses) is paid to Rick. Beginning the following January 1, the trust will begin making regular six percent payments to Rick, and then, after his death, to his daughter. Upon Alice’s death, the trust will end, and the remaining assets will be used by Stanford to endow a fellowship fund in the names of Rick and his late wife.
A win-win solution for charitable giving
With a charitable remainder unitrust gift, the Blochs were able to maximize their contributions, reduce their tax burden, and help to set the Stanford Law School up for long-term success.
The rewards of retirement
His gift will fight cancer. Hers will help deserving students. Both provide annual payments to the donors for life.