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Phoebe has been a long-time volunteer at her favorite charity. The charity is currently raising funds to construct a new building. Phoebe has appreciated stocks that she would like to use to help the charity meet its needs today, but she worries that she might outlive her money and income during her retirement years.
After meeting with her advisor, Phoebe decides to gift a portion of the stocks to the charity. Not only does she receive personal satisfaction knowing she is helping a cause that is close to her heart, she also receives a charitable income tax deduction and avoids the capital gains tax liability that she would have faced if she had sold the stock herself. She uses the rest of her stock to fund a unitrust, which her attorney will draft as a NIMCRUT. The trust will produce an additional income tax deduction when she transfers the stock to the trust and will supply her with income when she retires. The unitrust will provide Phoebe with income for the rest of her life and then, when she passes away, the remainder will go the charity.
Chandler and Monica own development property that they purchased years ago for $300,000. Real estate prices have skyrocketed and the property is now worth $900,000. They want to make an outright gift to their favorite charity's current capital campaign but they also want avoid tax on the sale of the property and receive income. They work with their advisor and decide to make an outright gift of one third of the property and use the remaining two thirds to fund a FLIP unitrust. In order to accomplish this, their advisor guides them through executing two deeds to the charity. The first deed transfers one third (or $300,000) to the charity outright. This current gift will produce a $300,000 deduction which, based on their income tax rate of 35%, will save them $105,000. Because the property is appreciated and transferred before the sale, they also avoid payment of $37,600 of capital gains tax.
The second deed is transferred to the charity as trustee of Chandler and Monica's FLIP unitrust. By using the remaining two thirds of the property to fund the trust, Chandler and Monica will receive a deduction of $315,750 and income of $30,000 plus potential growth from the trust each year for the rest of their lives. Because the trust is drafted as a FLIP trust, the charity is able to avoid making income payments until after the property is sold (i.e., after the FLIP trigger event). Note that, because the charity is named in both deeds and has control over 100% of the property there should be no minority or lack of marketability discount that would affect Chandler and Monica's charitable deduction. After both Chandler and Monica pass away, the remainder will be distributed to charity.
Rachel White is 75 years old. She has an IRA and began taking her RMDs when she reached age 70½. Because she is receiving rents and profits from her investment properties, she does not need her RMDs and does not like that she is being pushed into a higher tax bracket because of her distributions. She also wants to contribute to a local charity to support them this year, as well as to leave a legacy gift after she passes away. However, she wants to be certain that she provides an inheritance for her daughter, Emma.
She meets with her attorney to see how she can accomplish her goals. Rachel's attorney told her about the IRA charitable rollover and explained that she could transfer up to $100,000 from her IRA each year to a qualified charity without paying tax on the distribution or including the distribution in her AGI. Rachel was thrilled and decided to contact her IRA custodian right away to ensure that her RMD will be directly transferred to the local charity. She plans to continue making these IRA rollovers for the rest of her life.
Rachel also asked her advisor to help her come up with a plan that would enable her to use her remaining IRA balance when she passes away to provide an inheritance for Emma and also pass on funds her favorite local charity. Rachel's attorney assists her in creating an unfunded unitrust for her life plus a term of 20 years. Under state law, the unfunded trust is valid but will not be active until Rachel passes away. Rachel fills out a beneficiary designation form for her IRA naming the trustee of the unitrust as beneficiary of her IRA. This trust will receive the IRA after Rachel passes away, enabling the trust to make payments to Emma for a period of 20 years. At the end of that time, the balance of the trust assets will be distributed to the charity.
Blended Gifts Part II
Blended Gifts – Part I
Navigating the Unrelated Business Income Tax – Part II
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