Case Studies on Types of Unitrust Payouts
Michael "FLIP's" for Spouse:
Michael Williams just turned 70 ½ and has begun the mandatory withdrawals from his individual retirement account. The assets of the IRA have been invested primarily in equities over the past ten years and Michael has been pleased with the growth of the account over that period. What was once a very moderate account has grown to over $1.5 million in value and, therefore, he will be required to withdraw over $100,000 per year based on his life expectancy. He plans to leave the balance of the account to charity upon his death, but he has become concerned about providing for his spouse when he is gone. They do have $3 million in other assets, but the majority of the $3 million is in income-producing real estate which he manages. The real estate produces a very nice income stream (over $200,000 net per year), but this is primarily because of Michael's management expertise. He is very concerned that should he predecease his spouse that the real estate will not produce near this kind of income because he will not be available to provide the savvy management skills.
Three Thousand Shares of Stock, Two Possible Trigger Dates, and One FLIP:
Sarah Stevens, a 42 year-old CEO and MBA graduate, has managed to build a very successful technology company from scratch. Over the past ten years, her closely held company has grown exponentially. In order for it to maintain this incredible growth, Sarah decided many months ago to take the company public this December. Based upon its business model and current success, Sarah's company is expected to be a "hot" IPO. Sarah also knows that despite her company being worth a great deal, she will continue to receive a lower income until the company can start to turn larger profits. In fact, during the past several years, Sarah has paid herself only a moderate salary as she poured money back into her company.
FLIP Unitrust v. NIMCRUT - And the Winner is ...:
Samantha and Kevin Donaldson, both 55, have been married for over thirty years. They are professional musicians and have been members of the city orchestra for twenty years now. Not surprisingly, Samantha and Kevin are passionate supporters of music. They hold workshops to teach young people musical instruments, and can be frequently found passing out flyers to encourage attendance at the city orchestra's performances.
In a recent visit with the orchestra's gift planner, Jamie Evans, the Donaldsons indicated their desire to leave a gift to the orchestra upon their death. The Donaldsons estate was valued at $2 million, and they envisioned a bequest of $200,000. Jamie then described the benefits of a Charitable Remainder Trust (i.e. tax deduction now, bypass of gain, increase income) and suggested it as an option. The Donaldsons loved the idea they could receive an income tax deduction now for a gift they planned to make in the future. Furthermore, they had a large block of appreciated assets that would be well suited for the CRT. The only reservation the Donaldsons had was the increased income. They were currently in their highest income earning years, and did not need to boost their taxable income. Preferably, the Donaldsons would like to defer the income until they retire. Therefore, they ask Jamie if there was a way to structure the CRT to act like a retirement vehicle. Jamie recalls a session she attended that discussed the use of FLIP Unitrusts and NIMCRUTs as retirement vehicles, however, she was unsure which CRT was more appropriate in the Donaldsons situation. Which CRT should the Donaldsons utilize for their situation, a FLIP Unitrust or a NIMCRUT?
Exit Strategies for Real Estate Investors, Part 2:
Karl was a man with the golden touch. Throughout his life, it seemed every investment idea that he touched turned to gold. Karl's passion was real estate and he was very successful in his investments.
Karl continued to buy and sell real estate at the age of 85. His latest venture led him to a great investment property. It was a "fixer-upper" commercial building in a great area. While other buildings nearby sold for over $2 million, the seller needed to sell quickly and was asking just $1 million.
The condition of the building turned many buyers away. It was being sold as is, but Karl was not deterred. He could see great potential with the building and knew it would not take much work to get it into market condition. Karl swooped in, bought the building for $1 million and instantly hired contractors to refurbish the place.
After three months of hard work refurbishing the building, the place looked like new! In the end, Karl invested $250,000 in the building, bringing his total investment in the property to $1.25 million. One month after the completion of the work, Karl was contacted informally by a company that expressed an interest in the building a $2 million interest! This was no surprise to Karl as he knew the building was a great buy.
There was one downside, however, to the idea of selling. Karl held the property only four months, which meant the gain from the sale would be short-term capital gain. In other words, the applicable tax rate would be 40.8%, not 23.8%. Karl cringed at the thought of paying much of his gain to the government. At the same time, Karl knew the real estate market could change directions in the next year. Although Karl wanted the 23.8% tax rate, he did not want to risk holding the property another eight months.
After Karl learned about the benefits of a FLIP CRUT, he eagerly wanted to move forward. It looked like the perfect solution. However, there were still two potential downsides to this plan.
What are the charitable income tax deduction rules for gifts of short-term capital gain property? If Karl moves forward with this plan, how would the FLIP CRUT payouts be taxed?
Exit Strategies for Real Estate Investors, Part 14:
Karl Hendricks was a man with the golden touch. Throughout his life, it seemed every investment idea that he touched turned to gold. Karl's passion was real estate, and he was very successful in his investments.
Lucky Lucy Lindstrom's Unitrust :
Lucy Lindstrom finished college and headed west. She started as a financial analyst with a large company in Seattle. After just four years, she became a Registered Investment Advisor and began advising clients. Lucy also managed her own investments. With her keen insight into financial markets, Lucy soon began to move from traditional stocks and bonds into futures and commodities markets. Lucy realized that "shorting" financial stocks was going to be a bonanza. She was so successful in the down market that she now only manages her own large personal portfolio.
Somewhat late in life, Lucy discovered the wonderful world of philanthropy. She volunteered at her favorite charity and has learned that giving a helping hand to someone in need is even more gratifying than making another million in the futures market. After reading in a charity's weekly enewsletter about a charitable remainder trust, Lucy called Clara Johnson, a gift planner at her favorite charity.
Lucy suggested that she would transfer $5,000,000 of securities to a 5% net plus makeup unitrust (NIMCRUT). She would serve as trustee, make the investments and the charity would be the remainder recipient. Since Lucy normally earns 18% per year on her futures and commodities investments, she feels that it would be easy to make the unitrust grow to $10,000,000 or more.
Would this plan work? May Lucy serve as trustee? Is it permissible to invest unitrust assets in the futures market?
Turning a Farm into a "Field of Dreams":
Duane and Ruth Bradley, both age 65, have farmed their homestead for the past 35 years. Ruth inherited this land consisting of 85 acres from her grandfather in the late 1950s. At the time of the inheritance, the acreage was valued at only $100 per acre and therefore, the basis in the property is only $8,500. Over the last ten years, the local community has experienced substantial development and now the property is located right on the outskirts of town. The property in the area is now selling for $12,500 per acre and therefore, the fair market value of their land is currently over $1 million. Duane and Ruth have been planning to use the property for their retirement as they have been unable to put any substantial sums aside over the years for this purpose. They have sacrificed greatly to put each of their five children through college and now must think about their retirement. Fortunately, the land has appreciated greatly over the last few years and they can now look to the property to provide a comfortable retirement.
Still Time To FLIP?:
Jake and Kristine McCarthy, both age 75, created a two-life plus 15-year term net income with makeup charitable remainder unitrust (NIMCRUT) about 10 years ago. They chose a payout rate of 5% and funded the trust with $500,000 of highly appreciated stock. Since Jake was a keen stock investor (and since he liked to keep control of their investments) he decided to self-trustee the unitrust. Since they really did not need the income from the trust, Jake made the decision to invest 100% of the trust assets in an aggressive portfolio consisting of stocks and mutual funds. Periodically, he would buy and sell but, for the most part, he followed a buy-and-hold strategy. Over the years, the dividend yield on these investments has averaged 2% and the capital growth yield has averaged about 10% for a total return of 12%. Because of Jake's investment strategy, the trust has grown to over $1.2 million and the deficit account is now about $250,000.