Recently, a steadfast supporter visited our office to assure us that she would soon be making her very generous annual Generations gift. She hadn’t already done so because she was waiting for the stock market to settle. The gains and losses of the stock market can be very unnerving to our supporters who rely on their investments to provide income. Our solution to giving in such an environment? Charitable remainder unitrust.
Middle-class investors are facing federal and state income tax bills that could drain 25% or more of their 401(k), traditional IRA, and other tax-deferred retirement accounts, and many don’t even realize it. Establishing a charitable remainder unitrust (CRUT) is a wonderful solution for reducing income taxes during retirement and effectively increasing retirement income. CRUTs have existed in the tax code for decades. You can typically create one for $2,000 or less in legal fees, and they offer many investors the opportunity to save tens of thousands of dollars in income taxes.
When you set up a charitable trust, you receive an immediate deduction to use against your income taxes while you are alive. And a $2,000 outlay that saves you tens of thousands of dollars is a pretty good return on investment.
Here’s how they’re structured:
You, the donor, designate a portion of your retirement savings that you want to transfer into the charitable trust. You are then required to receive income back from the trust for the rest of your life. The amount of annual income you receive each year must be between 5% and 50% of the trust assets. You select the percentage at the time of the trust formation. That sounds like a good deal, right? When you pass away, whatever is left in the trust at that time goes to whatever nonprofit(s) you originally designated in the trust to receive the money.
When you first set up the trust, based on your age and the income percentage you elect to receive each year, you receive, while you are alive, an immediate deduction to use against your income taxes. Let’s take a look at an example.
Suppose you’re 65 years old and put $200,000 into a CRUT. Further suppose you choose to take 6% of the trust value as income back to yourself each year.
Based on your age (65) and the income percentage you choose (6% of annual trust value), the IRS actuarial tables dictate that you would receive an income tax deduction of approximately $77,000 on the $200,000 you put into the trust! The gift to Pardee Hospital Foundation would actually cost you $133,000 while you will receive $12,000 in annual income initially.
The charitable remainder unitrust is a tax- and income-smart solution for you if you have a stock portfolio with a high capital gains tax liability. You can transfer the entire portfolio to a CRUT, thereby reducing and spreading out any capital gains tax while receiving an immediate tax deduction and guaranteeing yourself and your spouse an income.