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Net Income Unitrust
A net income unitrust distributes the interest and dividend income earned by the trust each year,
up to a maximum percentage.
Since a net income unitrust distributes the net income it earns, but not the principal of the trust, the distributions depend on the interest and dividends that it receives from investments. We tend to invest a significant portion of the assets in bonds, although we balance the bonds with some equities.
The distributions from a net income unitrust will vary somewhat from year to year depending on prevailing interest rates and dividends.
Here is An Example:
"How Can I Protect the College's Gift?"
Mr. Ruiz, age 68, would like to give the College his rental house by funding it into a trust that will provide him with some income during his lifetime. He is concerned, however, that the remainder interest that will benefit the College upon his death not be eroded by the payments made to him. He wants the income to come to him and the principal to be protected for the College.
Mr. Ruiz's house is valued at $400,000; he bought it in 1981 for $100,000. He establishes a net income unitrust and transfers the house to it. The College will undertake the entire burden of selling the house. Until it sells, Mr. Ruiz will continue to pay for any expenses associated with the house, such as insurance, taxes, gardening and repairs.
The trust provides for all of the income, up to 5% of the value of the assets, to be paid out to Mr. Ruiz. In the first year of the trust, the trustee sells the house and reinvests the proceeds in securities. Since Mr. Ruiz does not need a great deal of income, the trustee invests for a combination of growth and income. In the following year, the trust earns 3% on net proceeds, or $10,800, which it distributes to Mr. Ruiz.
Mr. Ruiz avoids all of the $300,000 in capital gain that has accumulated in the property. He will be able to claim a charitable deduction of $203,648.
Upon his death, the assets will provide an endowment for the Music Department according to his wishes.
Please contact us for more information on your particular situation.
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