Charitable Remainder Trusts

Have you begun the process of divesting farm ground, rental properties, or a small business in preparation for retirement? Or is all of your cash tied up in these enterprises?  If so, a Charitbale Remainder Unitrust (CRUT) may allow you to reap benefits of which you were unaware, including:

  • A lifetime of income
  • Immediate income and tax deduction
  • Exemption from tax on investment income
  • Income can be deferred until after retirement to tax take advantage of lower tax brackets

The CRUT was created for those without significant liquid assets, but who had tangible assets or real estate.  Consequently, common asset types for funding a CRUT are productive farm ground, an investment portfolio, rental property, an operating business, etc.  Because it is a legal trust, a CRUT needs to be created by an attorney.  Once created, the investor simply transfers their income-producing assets into this trust in order to begin receiving the benefits.

As an example, consider the case of Mrs. Scarlett. Mrs. Scarlett’s husband passed away and left her with a parcel of farm ground worth $1 million. She had no need for the farm ground and didn’t want the hassle of dealing with it, so she planned to sell it.

When the land was purchased, Mr. Scarlett paid $40/acre.  Today, the land was worth $4,000/acre.  If it was sold, Mrs. Scarlett would have paid nearly $200,000 in capital gains taxes. Then she would probably have taken the remaining cash and invested it in the stock market which has historically enjoyed returns of between 7% and 8%, which would cause another $15,000 in income taxes. In one year, taxes would have slashed her inheritance from $1 million down to $785,000.

Instead of selling the land, Mrs. Scarlett created a Charitable Remainder Unitrust and transferred the land into it.  Following the transfer, the trust – NOT Mrs. Scarlett – sold the land.  Because the trust does not pay capital gains, the full sale price of $1 million was available to invest.  She choose a 5% distribution/yr. to receive from those trust funds, and used that distribution to purchase a life insurance policy on herself with her children listed as beneficiaries.  At her passing, the remainder of the funds left in trust will go to charity, and her children will receive the death benefit of her insurance policy tax-free.

Although we cannot create the trust, the Friends University Office of Planned Giving would be honored to review your situation and advise you so that you are prepared to speak to your attorney about this valuable option. Call 1-316-295-5648 or send an e-mail to david_alexander@friends.edu to set up an appointment!