For many people, real estate represents the largest portion of their net worth. Real estate has been a popular investment tool both for income and long-term appreciation. Due to recent rapid increases in property values, however, income generated from rental properties may not be in line with increased property values. As a result, some people are forgoing higher income from their assets, hesitant to sell their property because of the large capital gains tax liability.
Charitable remainder unitrusts (CRUTs) can be highly effective tools for converting real estate into higher income producing assets. CRUTs may accept real estate as an asset, and then pay the net income generated by the property to the trust beneficiaries or sell the property and then pay a fixed percentage of the value of the assets. With the increases in real estate values, a property that previously provided rental income that represented 5 percent of the value of the property may now only generate 3 percent. A CRUT is able to sell the property, reinvest the proceeds into a diversified portfolio of securities, and pay 5 percent of the trust value, all without any capital gains tax liability for the donor. The unitrust will be revalued each year to adjust the amount of payment to reflect a current 5 percent distribution.
Karen and Jack Armstrong '57
Karen and Jack Armstrong, both class of '57, donated nine condominiums to Whitman through a unitrust. They received a current charitable deduction based upon the appraised value of the condominiums at the time of the transfer. While the properties were being sold, the Armstrongs received the net income generated by the trust. After the completion of the sale of the final condominium, the trust switched to a fixed percentage payout method, and will now pay the Karen and Jack a fixed percentage of the value of the trust for life.
Betty Jo Sargent '48
This same strategy is also used by people who are simply no longer interested in the work and responsibilities involved with managing real estate. Betty Jo Sargent '48 wanted to establish a trust at Whitman with her house in Port Ludlow, Washington. She transferred the house into a unitrust and the College, serving as trustee, managed the sale of the house. The proceeds from the sale were invested into a widely diversified portfolio to generate income for Betty Jo. She now receives quarterly payments from the trust, and will continue receiving payments for life.
As with other CRUTs, donors are entitled to a charitable income tax deduction based upon the terms on the unitrust. Real estate funded unitrusts are an excellent vehicle to convert real estate holdings into an easily managed retirement income. A real estate unitrust combines asset reallocation, retirement income, and charitable support into one efficient strategy.