Mr. Smith, age 65, is in the 35 and 15 percent federal income tax brackets for ordinary income and long-term capital gains respectively. He owns stock with a current market value of $200,000, which he bought some years ago for $20,000. Mr. Smith would like to sell the stock, but if he does, he will have to pay federal capital gains tax of $27,000.
By transferring the stock to a 5 percent Stanford unitrust, he will receive an income of 5 percent of the annual value of the trust assets for life. In addition, he receives a charitable income tax deduction of about $93,000 (based on an IRS discount rate of 4.6 percent). This saves him about $32,600 in federal income tax, and he avoids paying now the capital gains tax that would have been assessed if he had sold the stock. His net cost of establishing the $200,000 trust, as opposed to selling the stock and reinvesting the net proceeds, is approximately $140,400.