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Monday, April 29, 2024
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Case Studies |
A Unitrust with a DAF for Education
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Case:
Elizabeth Johnson, age 70, was a distinguished professor of biochemistry who devoted countless hours to research, writing and lecturing. During her years of study, she had attended many universities. Elizabeth, as a student and professor, was also involved with many charities, especially ones that helped disadvantaged youth. In fact, after she retired, she volunteered her time at an inner-city elementary school tutoring children in science and math. Elizabeth would encourage those children to study and continue their education. She knew, however, that many of those children's families would have great difficulty paying for a college education. While Elizabeth was aware she could not help every disadvantaged child, she knew that she could do something.
Many years ago, Elizabeth had purchased a piece of real estate outside of town. There had been tremendous growth in the years following her purchase. That piece of land that was outside of the city years ago was now a prime piece of real estate. In fact, a developer recently approached Elizabeth about selling her land. She was tempted by the developer's offer, especially because the market for real estate was good. She could then invest that money in another asset. But, she knew that if she did sell, she would have to pay a large capital gains tax.
Elizabeth had for many years made cash contributions to all of the universities she attended. She wondered if there was some way she might be able to use the land to provide income for herself, should she need it in the future. She knew she would not use all of the money from the land, and she would like to set up scholarships for disadvantaged students. Elizabeth contacted the development department at one of her alma maters. She explained her situation. She also explained that while she would like to set up a bigger scholarship fund at that university because it had more disadvantaged students, she would feel bad about not doing something for the three other universities she attended. If possible, she wanted to establish scholarship funds at the other universities, but only for a period of time, perhaps 10 years.
Question:
How can Elizabeth use this one piece of land to provide income should she need it and also establish a permanent scholarship funds at one university and establish three other scholarships funds that would last only for 10 years?
Solution:
After Elizabeth explained her wishes to Glenn Ford, the planned giving director at her favorite alma mater, he suggested that she set up a net income plus makeup unitrust. She could place this piece of property into the trust and the trust could sell it without paying any capital gains tax. Once the property was sold, the money would be reinvested in growth assets that produced little or no income. If the trust did not have net income for the year, Elizabeth would not receive any income. However, if she ever did need the income, the trust assets could be invested so that the trust would produce income and make distributions to Elizabeth.
He then suggested to Elizabeth that she could have more than one charitable remainderman for her trust. She could give a percentage to her favorite university to establish a scholarship fund for disadvantaged students and with the remaining percentage, she could establish a donor advised fund (DAF) that would last for 10 years. The DAF could be set up with her favorite university and would pay to her other alma maters for that period of time. Elizabeth was very happy to see that all of her wishes could be achieved, and was especially delighted to know that she could do something to make a difference in disadvantaged students' lives.
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