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Part 47

Thomas M. Boles, 33°, G.C.

The Charitable Unitrust pays income to family members while providing a tax-deductible donation.

Hi again! In my last article I gave the explanation for an Annuity Trust. This month, I would like to familiarize you with a Charitable Unitrust. This happens to be my favorite because it offers so many advantages to a person or persons who want the best out of an investment.

The Charitable Unitrust is a special trust that pays income to family members. After all of the income payments have been completed, the remainder is distributed to a qualified charity, such as the Scottish Rite Foundation, S. J. The person who establishes the trust may select the unitrust percentage, the persons to receive the income from the trust, and the charities which will receive the principal of the trust after all income payments are completed. The major benefits of the trust are (1) Bypass of Capital Gains Tax ®

(2) Increased Income and (3) a Charitable Income Tax Deduction.

Investments of property eventually mature. After a very good investment has appreciated, the yield or earnings on that investment may then be quite low. At certain times, it is wise to sell a property and reinvest the proceeds into a new property for maximum investment gain. The unitrust is an ideal method for a tax-free reinvestment since the qualified unitrust bypasses the capital gains tax. The full amount received from the sale will then be reinvested.

Mature investment properties frequently are earning two, three, or four percent per year. The capital gains tax-free reinvestment through the unitrust might enable a person to sell through a trust without taxing an asset earning a low rate of return and to reinvest in an asset earning a higher rate of return. The increased earnings can then be passed on to the income recipient(s) using the unitrust income produced by higher yield investments. Over the years, family members can reinvest the additional income and acquire even greater economic security.

After the completion of all income payments, the principal or corpus is distributed to charity. Even though charity might not receive anything for many years, the government permits the trust grantor (the person who established the irrevocable trust) to take an immediate income tax deduction. The deduction is a percentage of the value of the property transferred to the trust and is calculated using the ages of the donor(s) and the unitrust percentage selected. Many trust donors use their current tax savings for additional investments and thus are able to enjoy the maximum return from their charitable trust payments and also benefit at the same time from substantial income tax savings.

Each grantor may select the unitrust percentage. The unitrust percentage may amount to five percent or more of the value of the trust. Each year the trust accountant determines the fair market value of the trust. The unitrust then pays the selected percent of the fair market value to the family. For instance, if a trust is valued at $100,000 and the trust grantor selected a 6% unitrust percentage, the accountant would multiply the 6% times the $100,000 in value and distribute $6,000 that year. If earnings were 7% or 8% and the trust distributed 6%, the extra 1% or 2% would be added to principal.

Since the income payments depend upon the value of the trust, many select a lower percentage and then hope to benefit from the growth of the trustís value during the later years of the trust.

In addition, the trust grantor may also select the time for which payments are to be made. This time may be one life, two or more lives, or a term of one to twenty years. Each unitrust must have a trustee. The trustee can be a commercial institution such as a bank or trust company, a charity, an individual, or a combination of two of these three options. The trustee will have to invest the property, conduct any sales, and file the appropriate information and tax forms. Since the trust may last for many years, it is important to select a trustee in whom you have confidence.

Finally, the trust grantor may select the charities that will receive the trust remainder (the corpus of the trust after all income payments are completed). The entire corpus could be distributed to one charity, or the corpus may be divided among several charities. The selection of the charities is entirely under the control of the trust grantor.

I hope this helps you understand one of the best trusts available on the market, but if you have any questions, please give me a call. Next month, Iíll try to give an easy explanation of our wonderful Pooled Income Fund. It, too, is a wonderful way to increase income and save on taxes. Which leaves my ďadĒ for this month to read: Trusts are not a new invention. They have been used successfully for centuries. Why not put one in your future -- now?


Please Note: This information is distributed with the understanding that the author is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expertise is required, the services of a competent professional should be sought. From: A Declaration of Principles jointly adopted by a Committee of the American Bar Association and a Committee of Publishers.