• "I am deeply grateful to the Masonic Village's employees, and will never be able to express my gratitude to all of them." — Catherine L.

  • "I liked my Masonic Charity Foundation charitable gift annuity so much, I opened three more. Why? I might be old-fashioned, but the scriptures have taught me the virtue of looking out for others. Knowing that the funds left in my gift annuities will care for the Masonic Village residents makes me feel wonderful." — Dorothy B.

  • "I am writing to tell you, from the bottom of my heart, just how wonderful the last two years of my mother's life were, thanks to all of you at the Masonic Village at Burlington." — Carol O.

  • "It's not just the Masonic Village's beautiful facilities and the many services that are offered to the residents – most of all, it's the employees. They are personally dedicated it seems to each and every individual here." — Catherine L.

  • "We are equally grateful for the 'loving arms of hospice' that were wrapped around our family in our hour of need." — M.W.

  • "When we decided to come to the Masonic Village at Burlington, we knew it was going to be a very big change in our lives. When we came here, we were very pleased that it was not difficult. We would recommend the Masonic Village highly to a friend." — Joseph and Bertha B.

  • "There is simply no way to express the depth of gratitude I feel for the Masonic Village at Burlington – thank you!" — Jim C.

  • "We know first-hand how very special Acacia Hospice's caregivers are, and we thank every single one of them from the bottom of our hearts." — J.M.

  • "It is with a grateful heart that we extend to you our deepest gratitude for the loving care that Acacia Hospice afforded our beloved Aunt." — M.W.

  • "It has been a source of tremendous relief that my parents were in such caring and professional hands during the final years of their lives." — Jim C.

  • "It takes a very special person to do the job Acacia Hospice's caregivers do every day. We would like you to know we think you have an incredible group of 'Angels.'" — J.M

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Sunday September 15, 2019

Case of the Week

Stock Unitrust Payouts to Donors

Case:

Jim Thompson, a retired engineer, and his wife Janet Thompson, a retired nurse, are currently considering funding a term-of-years charitable remainder unitrust with an arts charity. The charity is raising money for the construction of a new building which would house a state-of-the-art theatre and museum. The Thompsons are active investors and have amassed quite a portfolio over the past few years. In particular, they have investments in a medical services company that has quadrupled in value. They would like to use $800,000 of stock with a cost basis of $100,000 to fund a five-year CRUT with a 15% quarterly payout. However, they believe this company is a great investment with acceptable risk and prefer that the trustee of the CRUT not sell this stock for the duration of the trust. Furthermore, the Thompsons would like their CRUT payouts to be the actual stock — an in-kind distribution — as opposed to cash payouts. Thinking creatively, the Thompsons then wonder if such a distribution would avoid capital gain since technically the stock has never been sold.

Question:

Can the Thompsons accomplish their goal of a tax-free 'in-kind' distribution of their medical services stock? What are the tax consequences to the CRUT and to the Thompsons of such a transaction?

Solution:

Internal Revenue Code Regulation Section 1.664-1(d)(5), which deals with distributions in-kind, states that the amount paid shall be considered as an amount realized by the trust from the sale of the property. With respect to the Thompsons, their basis in the stock will be its fair market value (FMV) at the time it was paid to them as a trust payout. Therefore, the trust has an amount transferred of $120,000 (800,000 x 15%) in its first year. The trustee will realize $105,000 of the $120,000 as capital gain and $15,000 (100,000/ 800,000 x 120,000) as corpus. Under the four tier accounting rules of Section 664(b), the Thompsons will report $105,000 of capital gain and the remaining $15,000 will not be taxable as it is a return of capital. Finally, the Thompsons' new basis in the stock will be $120,000, which was its FMV at the time it was distributed.

Under this plan, the Thompsons receive a partly tax-free distribution. However, when taking into account their income tax deduction of $370,000, over $500,000 of projected income over the five-year term, and an estimated gift to charity in excess of $450,000, the Thompsons are very pleased with this arrangement. Because of their wonderful generosity, the Thompsons have the gratification of knowing they helped build a home to the arts that will last a lifetime.

Published September 13, 2019
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Previous Articles

The Values-Based Charitable Remainder Trust

The Values-Based Lead Trust

No Marital Deduction Needed

The Gas Guzzler's Deduction, Part 3

The Gas Guzzler's Deduction, Part 2

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