LegaSea Society

Which Is Better: Annuity Trust or Unitrust?
Whether you choose an annuity trust or a unitrust depends primarily on your economic outlook. With an annuity trust, you receive the same fixed amount each year that you choose at the beginning. This is advantageous when you want to be certain of the dollars you'll receive. If you're concerned about the possibility of recessionary times and falling market values, the annuity trust has greater appeal. Although you can't add to this annuity trust later in order to increase your income, you can always create a new trust for that purpose.

In comparison, a unitrust may be a hedge against inflation. If you foresee economic growth resulting in appreciation of the trust's assets, you'll favor a unitrust. The valuation can rise or fall, but over time a well-managed unitrust may offer better protection of your purchasing power than fixed dollar payments. A further advantage is that if you want to enlarge the trust later, you can make additional contributions without the cost of creating and administering more than one trust.

Marvelous Tax Benefits
Now look at the major and wide-ranging tax savings you can realize when you create a charitable remainder trust.

First, when you fund the trust, you immediately obtain the benefit of a sizable income tax charitable deduction. This is equal to the present value of the remainder interest ultimately payable to The Ocean Institute, based on Internal Revenue Service tables of life expectancy factors. The older the beneficiary, the greater the charitable deduction.

You can fund your charitable remainder trust with cash, securities or other property. Highly appreciated assets that generate low current income are an ideal funding medium.

While you'd be reluctant to sell such assets directly because of the tax you would pay on the gain, you can transfer them to the trust without incurring the capital gains tax. The trust could sell the assets without incurring any tax and then reinvest the proceeds in order to secure a higher current income yield.

Perhaps over the years your personal investments have grown handsomely, but you now realize that their yield is grossly inadequate. Unfortunately, if you sell and reinvest in higher yielding securities, you'll lose part of your gain to taxes.

The answer? Transfer your appreciated securities to a charitable remainder trust. In return for your gift, you might get an income two to four times greater than the current dividend from the typical growth stock.

Example: Krista, aged 75, owns several stocks with a market value of $100,000, but they pay dividends of only $2,000 a year, or 2 percent of market value. She decides to transfer these securities to a charitable remainder annuity trust that will pay her $7,000 a year, increasing her gross income by $5,000.

If Krista sold her stocks instead, she would pay an enormous tax on her capital gain. Their cost basis is $30,000, compared to the current market value of $100,000, resulting in a gain of $70,000. At a federal capital gains tax rate of 15 percent, the tax would be $10,500. This would leave her with only $89,500 to reinvest, so she would have to find stocks that pay a dividend of more than 8 percent to receive the same $7,000 her trust can pay her.

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