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Basic Unitrust
A basic unitrust
distributes a fixed percentage of the value of the trust assets. Since the value
of the assets change somewhat from year to year, the distributions to you will
also vary somewhat each year.
When you establish a basic unitrust, you and the College agree on a distribution rate for the unitrust. For younger individuals, we will probably suggest a distribution rate of about 5%. For older beneficiaries, we may suggest a slightly higher rate.
Each year, we revalue the assets in the trust. Then we multiply this value by the distribution rate and distribute the resulting dollar amount in monthly or quarterly payments. The annual dollar amount will vary somewhat from year to year.
Basic unitrusts may distribute principal as well as income. Therefore, our advisers invest for total return.
Here is An Example:
"How Can I Avoid All That Capital Gain?"
Mr. and Mrs. Simpson, ages 82 and 81, have stocks that they have owned since they were married 60 years ago. Good Growth, Inc., has increased in value, and the shares have split many times. Now they own 7,000 shares valued at $50 each. Their basis is $1 for each share, so if they sell the shares they will incur a capital gain of $343,000 ($350,000 less $7,000 basis).
The Simpsons would like to give their Good Growth shares to Pomona and avoid all of the capital gain. They would also like to receive an income stream from the shares. They therefore establish a basic unitrust that will distribute 6% each year to them.
The Simpsons are entitled to a charitable deduction for income tax purposes of over $193,000. They pay no tax on the capital gain. These two factors will save the Simpsons more than $120,000 in federal income taxes, assuming a tax rate of 27% for income taxes and a tax rate of 20% for capital gains. If their state assesses income taxes, they will have additional savings on their state income taxes.
In the first year, the Simpsons will receive 6% of $350,000, or $21,000, on an annual basis. If the value of the assets increases in the second year to $370,000, their payment for that year will increase to $22,200. If the asset value declines to $330,000, the distributions will decrease to $19,800.
NOTE - Donors may save taxes on their state tax returns, as well as their federal returns, as a result of making gifts to the Pomona Plan. In the example above, if the Simpsons lived in California, they would save more than $163,600 in federal and state income taxes. This assumes a blended federal and state tax rate of 35% for income taxes and 28% for capital gains.
Please contact us for more information on your particular situation.
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