Perhaps you own real estate you purchased years ago that has appreciated substantially in value. You would like to convert the land to an income-producing investment but do not wish to pay the capital-gain tax. An ideal way to accomplish these goals is to use your property to fund a special kind of trust—a charitable remainder unitrust with a so-called "flip" provision.
A "flip" unitrust provides a practical solution to the above investment dilemma because it limits payments to the beneficiary(ies) only to the extent the trust has available income (this allows the trustee to sell the property at the proper time for the best price). Later, upon the occurrence of a specified event (e.g., the sale of the property) the trust reverts to a standard unitrust that will distribute a stated fixed percentage of the value of the trust each year. We will receive the trust property when the last income beneficiary dies. Establishing the trust will entitle you to a charitable deduction for the present value of the property we will receive.
Depending on the trust provisions, a donor can secure some or all of the following benefits:
and, in every case, the satisfaction of providing support for a worthwhile endeavor.
Example: Sue, aged 60, owns land near the edge of a growing metropolitan area. She paid $25,000 for the land 15 years ago, and now it's worth $100,000. Because the land is right in the path of development, she anticipates that it will continue to appreciate at a healthy pace.
After careful consideration, Sue decides to create a "flip" unitrust with the land that will pay her 6% of its value for the rest of her life. As a result of her gift, Sue will receive a charitable income-tax deduction of about $34,000.
Knowing Sue's concerns about the land's appreciation and her desire for income in the future, the trustee retains the land in the trust. Of course, Sue will not receive any payments as long as the trustee holds the land because it does not produce income. If in ten years the land appreciates to $300,000 and the trustee sells it, the following year Sue will be entitled to receive a payment of $18,000. In subsequent years Sue will receive 6% of the value of the trust as it is determined each year.
The discussion herein is general in nature and may not apply to all individuals. Prospective donors are urged to consult their personal tax and financial advisors concerning the specific consequences of making gifts to Colgate. We would be pleased to discuss, in confidence, ways in which you may support Colgate. These measures may also have an impact on your estate planning.
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