Pitzer graduates, Bob, 60, and Susan, 60, own highly appreciated marketable securities with a fair market value of $300,000 and a cost basis of $30,000. These marketable securities provide dividends of $5,000 per year. Bob and Susan would face significant capital gains tax if they sold the securities themselves.
Wanting to make a significant gift to Pitzer and avoid immediate recognition of capital gains tax, Bob and Susan transfer the securities to a charitable remainder unitrust, which will provide them with annual lifetime payments equal to 5 percent of the fair market value of the trust assets as revalued annually.
The charitable remainder trust sells the securities in the first year, and Bob and Susan receive the following benefits:
- First Year Income $15,000
- Immediate Federal Income Tax Charitable Deduction $103,749
- Capital Gains Tax Avoided $40,500
Bob and Susan are pleased with the charitable remainder unitrust because they are able to reinvest the entire sale proceeds, increase their income, receive a generous charitable deduction, avoid capital gains tax and provide for Pitzer’s future.
This information is based on annual payments and a 2.8 percent charitable midterm federal rate. Deductions vary based on income earned.