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Wednesday, May 1, 2024
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Case Studies |
Deferred Gift Benefits Children's Hospital Now
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Case:
Ever since Theresa and Bob Anderson lost their child many years ago to disease, they have been true champions for children's disease research and care. They immediately started volunteering with the local children's hospital and eventually joined the hospital's foundation board. As active and compassionate board members, Theresa and Bob were commonly found fundraising at local events as well as consoling grieving parents at hospital bedsides.
Currently, the hospital is raising funds to build an additional research facility. Most of the funds for the building have been raised, but the hospital is still far from raising the money needed to buy land for the new facility. Interestingly, Theresa and Bob own about six acres of land about a mile away from the hospital. In fact, they considered giving the land to the hospital months ago when the capital campaign began. However, the six acres of land - valued at $1 million with a $200,000 cost basis - was the Anderson's nest egg. As badly as they wanted to help, they could not afford to make the gift.
Fortunately, the hospital's gift planner, Sue Wilson reviewed the Andersons' situation from a new perspective. She knew that the Andersons needed retirement income from their land. She also knew that the hospital needed the land now for the research facility, but did not have the necessary funds to acquire it.
Question:
What creative solution could Sue Wilson recommend that would achieve the Andersons' and the hospital's goals, given the restraints upon both parties?
Solution:
First, Sue suggested a charitable remainder unitrust (CRUT) "with a twist" as the solution to the current dilemma. The CRUT would provide the Andersons with three major benefits. The Andersons would bypass $800,000 of capital gain on the land. In addition, the Andersons, both 60, would receive a tax deduction of $300,000. Finally, and most important, the Andersons would receive a 5% payout, or $50,000 in the first year, from the CRUT. Because the trust assets are likely to grow, the Andersons' 5% payout would increase very nicely with time. For example, assuming an 8% trust return, the CRUT payout would be approximately $60,000 in year 10 and $70,000 in year 20.
The "twist" on the traditional CRUT is that the hospital would buy the land from the trust now. This would enable construction of the research facility to begin immediately. Because the hospital was unable to pay the $1 million purchase price, the CRUT would sell the land to the hospital in exchange for an interest-only secured promissory note. The terms of the note would be "nothing down with an interest rate of 8%," or $80,000 per year. In order to provide security for the payments, the note would be secured by the property. Therefore, each year the hospital would make its $80,000 note payment to the trust, which is something the hospital can financially afford. At the end of the CRUT term, since the trust assets (a note due to the trust by the hospital) would be transferred to the hospital, the note would be "forgiven" and the hospital would own the property outright.
This solution delights both the Andersons and the hospital. They were able to achieve their independent and common goals with one plan. This CRUT arrangement allowed the research facility to "break ground" the following month, and the research facility will appropriately be named after the Andersons' young son, Jared Anderson.
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