Charitable Remainder Unitrust (continued)
The unitrust is an individually managed trust paying its beneficiaries – you, your spouse, family members, or other individuals – income as a fixed percentage of the value of its principal, which is revalued annually. Here's how a unitrust works:
- The unitrust makes payments to the beneficiaries for their lifetimes, for a term of up to 20 years or for a combination of both.
- Beneficiaries receive a fixed percentage of the value of the trust's principal, which is revalued annually.
- Income and capital growth in excess of trust payments to beneficiaries are reinvested to maintain principal and allow for tax-free growth of the trust.
- When your unitrust terminates – at the death of the last beneficiary or at the end of the trust term – the remaining balance will be available to Franklin College for the use you designated when you created the trust.
What are the Tax Advantages of a Unitrust?
- If you fund a unitrust with appreciated securities or real estate, no up–front capital gains tax is payable by you or your trust. You can contribute appreciated but low–yielding assets and diversify tax-free, putting the full value of your gift to work generating higher trust payments.
- Similarly, no capital gains tax is applied to the growth of a unitrust's principal.
- You also receive a charitable income tax deduction when you create a unitrust. Your deduction will be based on the full fair market value of the assets you contribute reduced by the estimated value of payments beneficiaries will receive from the trust. We can calculate this deduction amount for your planning purposes.
Planning Tip – Grow Your Gift and Your Income
The standard unitrust is designed to pay you income as a fixed percentage of gradually increasing principal. Payments from a standard unitrust begin as soon as the trust is created and funded. Alternatively, it is possible to establish a trust now, secure an immediate tax deduction, but receive most of the trust payments beginning at a future date. Called a "FLIP" unitrust, this option is especially useful to donors who want to make a gift and secure a tax deduction now but who don't need income back until a future time, for example, at their retirement. This can be an attractive tool for younger donors wishing to build a supplementary retirement fund that will grow tax-free, then distribute payments in later years when they need it most.
How do You Create a Charitable Remainder Unitrust?
If you are interested in learning more about creating a charitable remainder unitrust, please contact us. You should also be advised by your own attorney with expertise in the area of charitable trusts and estate planning. To save you time and expense, we can provide you with an initial draft of the unitrust agreement for review by you and your attorney. Once your trust agreement is signed, you can fund your unitrust by transferring assets to your trustee. The Trustee can be Franklin College, yourself, or other trusted individuals or entities of your choosing.