Understanding a Charitable Remainder Unitrust

In research conducted involving 42 colleges and universities with endowments totaling $1.7 billion, the most frequently used planned giving instrument was the bequest. Bequests accounted for 55% to 60% of funds received from an institution’s expectancy pool. 
The second most widely used planned giving instrument was the Charitable Remainder Unitrust. It accounted for 19% to 25% of an institution’s expectancy pool. It is because of this finding that we would like to further explore the Charitable Remainder Unitrust.

What is a Charitable Remainder Unitrust?

A Charitable Remainder Unitrust is a planned giving instrument that enables a donor to contribute to his favorite organization yet retain a lifetime income from the gift. The annual income is a fixed percentage of the Unitrust assets as determined each year.

What are the characteristics of a Unitrust?

The most significant characteristic of a Unitrust is in the transfer of appreciated securities. The donor can transfer highly appreciated assets, receive income based on the appreciated value and not be subject to capital gain implications.

For example, in the case of a recent donor to a nonprofit, a donor will receive a contribution deduction of $54,000 on the transfer of $100,000. The amount of the deduction is determined by the payout percentage and the age of the donor.

If the donor had purchased stock at $10,000 that is now worth $100,000, the donor would receive income based on the $100,000 and not be subject to capital gain taxation.  In addition:

  • All of the income to the beneficiary is taxable.

  • There may be more than one beneficiary.

  • The percentage rate of return must be at least 5%.

Who are the prospects for a Charitable Remainder Unitrust?

Research in the field indicates that donors age 65 to 80, with no children, and no mortgage, are the most frequent users of a Charitable Remainder Unitrust. They like the fact that a Unitrust is a hedge against inflation and that they can receive an income based on the capital appreciation of their securities and not be penalized by capital gain taxes.

According to research conducted by a major institution, the following information was revealed after 588 Unitrusts and Annuity Trusts were examined:

  • Of the 588 trusts, 71.77% were Unitrusts and 28.23% were Annuity Trusts.
  • Some 63% were established in less than one year.

  • Of the 588 trusts, 63% were established in the last half of the year with more than half of that amount coming in December.

  • The mean payout for the Unitrusts was 6.99%.

  • The Type I or Standard Unitrust was used in 55.5% of the instruments and the Type II or Net Income with Makeup Unitrust (NIMCRUT) was used in 44.5% of the instruments.

  • The dollar range of the Unitrust and Annuity Trust in this sample research was between $100,000 and $299,999.

  • The average age of the Unitrust donors was 79.5 years.

  • A Unitrust can be funded with cash, real estate, or with negotiable securities.  Of the 588 trusts examined, negotiable securities were used in 62%.