Previous articles have highlighted planning opportunities for diversifying your assets and avoiding capital-gain tax through the use of a charitable remainder unitrust. We’d like to continue exploring the versatility of the unitrust by illustrating through the hypothetical example below how a unitrust can provide support for an older relative, benefit the university, and increase your annual spendable income.
Roger helps support his 75-year-old mother with gifts of $500 per month. In his 33% federal income-tax bracket Roger must earn more than $8,900 to net the $6,000 in gifts he makes each year. Roger would also like to make a significant charitable gift to us but feels that the financial challenge of assisting his children with college expenses and supporting his mother prevent him from doing so at this time.
After consulting his financial advisors and a member of our staff, Roger creates a charitable remainder unitrust that will pay his mother $7,000 per year. He funds the trust with growth stock worth $100,000 (purchased for $40,000) that had been paying him dividends of about $1,000 per year. He chose a unitrust because of the potential for the trust to grow in value and for his mother’s annual payment to also grow.
The results of Roger’s charitable arrangement:
- His mother will initially receive $5,950 after taxes in her 15% bracket.
- He receives a federal income-tax deduction of $50,124, saving him $16,540 in taxes.
- He avoids a potential capital-gain tax of $9,000.
- Although he will no longer receive $1,000 in dividend payments, he has reduced his income-tax bill by $330.
- He will receive an additional $5,330 of spendable income each year ($6,000 plus $330 tax savings less $1,000 dividends).
- After the death of Roger’s mother, we will receive the trust’s assets, which will be used to support a program that Roger and his mother have selected.
Note: The value of Roger’s mother’s income interest of $49,876 ($100,000 less $50,124) is a reportable gift for federal gift-tax purposes. However, Roger’s gift-tax annual exclusion and available gift-tax exclusion should offset any potential gift-tax liability.