Example 1: FLIP CRUTCharitable Remainder Annuity Trusts
Michael, 80, and Brenda, 78, want to fund a gift to benefit their favorite charity and receive income as well. Michael and Brenda own an undeveloped plot of land and currently have a buyer waiting in the wings to purchase the land. They originally paid $25,000 for the land, but it has appreciated to $175,000 in value. Based on Michael and Brenda's goals, Emma, the charity's planned giving officer, suggests a FLIP CRUT. The trust will start as a NIMCRUT and will pay out the lesser of trust income or the unitrust percentage. The sale of the lot will be the "triggering event." After the lot is sold, the trust will make payments based on the unitrust percentage. As there is a buyer waiting in the wings, the property is expected to sell quickly. Michael and Brenda deed the property to the trustee of the FLIP CRUT. As predicted, the property sells within a few months. On January 1 following the sale, the unitrust starts making payments at the standard 5% payout rate. Michael and Brenda will receive the benefit of a charitable income tax deduction of $98,812 in the year of the gift. Once the trust begins making payments, Michael and Brenda will receive an annual payment of approximately $8,750 in the first year. The subsequent payments will be based on the annual valuation multiplied by a payout percentage of 5%. The charity will receive a generous legacy gift.
Example 4: CRAT
Melinda, age 74, is looking to increase her liquidity in her retirement years. She is considering funding a gift with $150,000 worth of tech stock. The tech stock is paying a 2% dividend each year. Melinda explains to Dominique, the gift planner at her alma mater, that she is looking for a fixed income payment to supplement her retirement years. Dominique suggests that a CRAT might provide her the liquidity she desires. Melinda is pleased to learn that with a CRAT she can increase her liquidity, bypass the capital gain on the stock, leave a substantial gift to her alma mater and receive a charitable income tax deduction. Her basis in the stock is $70,000 and she would like a 6% payout. The 6% fixed payout passes the 5% probability of exhaustion test and the CRAT qualifies for a charitable deduction of $70,490. Melinda will receive an annual payment of $9,000, which is a much needed increase over her previous income from the dividends. Melinda is thrilled that she is able to leave a legacy gift to her alma mater.