Those of us contemplating retirement need to consider how we will make ends meet during our golden years. Many of us will receive Social Security or pensions, but most retirees will need to supplement their retirement income with their own savings: 401(k) accounts, IRAs, annuities, and other personal investments. There is also an option that can benefit a charity and your retirement at the same time.
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Consider a man, Sam, who is getting ready to retire. He has a rental property that he has owned for 30 years. He’d like to move to the country when he retires and does not want the hassle of being a long-distance landlord. However, if he sells the property, pays the tax, and then reinvests what’s left, it may not generate the kind of income Sam was enjoying while it was a rental. Both Sam and a worthy charity could benefit from a charitable remainder unitrust.
A charitable remainder unitrust (CRUT) is a trust that is set up to benefit a charitable organization. For someone like Sam, who wants to sell a significantly appreciated asset like real estate or stock, a CRUT is a potential solution. You can create an income stream for life, spread out the tax burden over many years, and do something good for charity at the same time.
The rules governing CRUTs are complicated. If you are going to set one up yourself you’ll need the counsel of an experienced attorney and accountant. Many charities have planned giving professionals who can handle many of the details for you. Sam’s rental property is worth about $500,000. Let’s assume he sets up a CRUT for the benefit of the American Red Cross. Here’s how everyone wins with a charitable remainder trust.
Tax savings. First Sam will donate the property to the CRUT, a portion of which will be a charitable deduction on his income tax return. The CRUT’s trustee will sell the property and invest the $500,000 of proceeds. If Sam had instead sold the property himself, he would have paid $150,000 in taxes, and been left with just $350,000 to invest.
Income stream. The terms of a CRUT require that a fixed percentage of the trust be distributed each year, usually to the donor. Sam elects to receive a 7 percent annual distribution for the rest of his life. The first year Sam will receive $35,000 (7 percent of $500,000). Each year after that, the dollar amount of the payment will change depending on the remaining value of the investments in the trust. Sam will include each payment in his taxable income, effectively spreading the tax burden of the sale of his property over several years.
Donation to charity. After Sam dies, whatever remains in the CRUT will go directly to the American Red Cross, as he designated when he set up the trust. Since the remaining value of the trust passes directly to the charity, it will not be included in Sam’s taxable estate. For those who prefer to leave all their assets to heirs, a CRUT would not be the right choice. But for a charitably inclined individual with highly appreciated property, a CRUT might be just the right tool to help fund retirement and help a charity at the same time.
Sydney Lagier is a former certified public accountant. Since retiring in 2008 at the age of 44, she has been writing about the transition from productive member of society to gal of leisure at her blog, Retirement: A Full-Time Job.