When the time has come to sell an appreciated asset, such as stock or real estate, capital gains taxes can be a real concern. That’s one reason why many Stanford alumni and friends, including Steve and Karen Ross (see their story on making a gift of real estate), choose to create charitable remainder unitrusts. This type of planned gift can provide a steady source of income now while benefiting Stanford in the future.
A unitrust is often funded with an appreciated asset, such as stock or real estate. The trustee usually sells the asset, invests the proceeds, and makes annual payments to the income beneficiary(ies). The amount of the annual payment is based on a percentage fixed at the creation of the trust that is multiplied by the fair market value of the unitrust assets, revalued at the beginning of each year. Donors usually name themselves as the income beneficiaries, though it is also possible to name others. At the end of the trust term, the remaining assets are distributed to Stanford for purposes designated by the donor. (For instance, the Rosses’ trust will ultimately benefit the Haas Center for Public Service.)
Because unitrusts are tax exempt, the sale proceeds on the sale of assets in the trust generally are not subject to capital gains tax at the time of sale, leaving full proceeds to invest in the trust and hence the opportunity for greater annual payments to the income beneficiaries than would occur using after-tax proceeds. This is often one of the primary motivations for creating a unitrust; the charitable income tax deduction to which the donors are entitled is another consideration.
For couples like the Rosses, the ability to fund the unitrust with a partial interest in a home may have additional financial and tax benefits. This arrangement generates cash for immediate use—helping to fund a transition to a retirement community—and continues to provide income payments throughout the beneficiaries’ lifetimes. In addition, if property being sold is a personal residence that a couple has resided in for two of the last five years, $500,000 of the gain is generally excluded from capital gains taxes ($250,000 for an individual). When a partial interest in a residence is used to fund a charitable remainder trust, this entire exclusion amount may be applied to the portion that is not contributed to the charitable remainder trust, resulting in greater after-tax proceeds.
If you are interested in a gift that will provide income to you or loved ones now and a future gift to Stanford, a charitable remainder unitrust may be a good option to explore.
For more information, please contact the Office of Planned Giving. We would be delighted to hear from you.