By Roger C. Hurd

HURD, HORVATH & ROSS, P.A.
Palm Beach Gardens, FL

Looking to increase income, decrease gains tax and reduce estate taxes?

If you have these objectives and also want to help a good cause, you might want to consider establishing a charitable remainder trust. It allows you to draw income on your property for a period of time or for life, while letting you defer your donation to the charity until the time when the income stream ends. To illustrate: Let's assume you have stock worth $500,000 which had cost you $50,000 and provides $10,000 (2%) in dividends per year. If you sell the shares, you would have a gain of $450,000 and a capital gains tax of $90,000. You could invest the remaining $410,000 and perhaps obtain 8% with relative safety, giving you an income stream of $32,800. Alternatively, if you do nothing before your death, you receive much less income, and your estate would be subject to as much as $225,500 in estate taxes on the property, leaving your heirs with only $184,500. Suppose, however, that you donate the property to a charity by establishing a charitable remainder trust.

By establishing a charitable remainder trust and donating the stock you will receive an income tax charitable deduction in the year of the gift. The charitable remainder trust could then sell the stock and because it has charitable beneficiaries it would not have to pay any income tax on the gain. The full $500,000 could be invested at 8%, giving you an annual income stream of $40,000 for life. Furthermore, the income tax savings could be used to purchase and prepay a $300,000 joint and survivorship life insurance policy on your life and that of your spouse. Placed in an irrevocable life insurance trust, it does not become part of your estate and avoids estate tax.

The result:

• 1. You have increased your retirement income by about 22%.

• 2. You have made a significant charitable gift that can help a good cause.

• 3. The value of the gift has been virtually fully replaced by the insurance trust.

• 4. Up to $275,000 in estate taxes has been avoided, increasing the inheritance of your heirs.

How do you do this?

Initially, the grantor creates a charitable trust. He has a choice of trusts between an "annuity trust" and a "unitrust."

• 1. In an "annuity trust," a sum certain, but not less than 5% or more than 50% of the original value of the trust estate, must be paid to the trust beneficiary annually. No subsequent additions may be made to this trust.

• 2. In a "unitrust," a fixed percentage, but not less than 5% or more than 50% of the fair market value of assets, determined at least annually, must be paid at least annually to the trust beneficiary. Additions may be made to this trust from time to time. Since the unitrust assets must be revalued every year, it would be wise not to transfer to the trust assets that may present a valuation problem. The unitrust, with its annual revaluation, is an excellent hedge against inflation.

A second common use of the charitable remainder trust is to provide current income for someone outside the family, such as a grandparent or a nephew, or a former employee. At the same time, the grantor assures that upon the end of the term or the death of the beneficiary, his favorite charity will receive all the trust assets, including any appreciation over the years. The actuarial value of the beneficiary's interest will be subject to gift tax. Where the grantor and his wife are beneficiaries, there will, of course, be no gift tax.
A third, and rare, use of the charitable remainder trust arises where the grantor wishes ultimately to make a large gift to his or her college, but, in the meanwhile, he wants to provide a less expensive source of funds for his or her children's secondary, college and graduate school tuition. The charitable remainder trust, for example, would provide income to the child between ages 14 and 26. The trust would be for 12 years. The income would be taxed in the child's lower income tax bracket and used as planned. When the child reached age 26, the trust assets would pass to the college or other charity. If the grantor transfers to the trust a highly appreciated asset, that might make the plan more attractive dollar-wise. Bear in mind that the grantor could make his gifts to the trust over a period of years.