Mr. and Mrs. George, both age 50, are in the 35 and 15 percent federal income tax brackets for ordinary income and long-term capital gains. They own stock worth $500,000, for which they paid $50,000 many years ago, and which they would like to sell. To do so would incur federal capital gains tax of $67,500. They want to make a gift to Stanford. They are not interested in receiving much income now, but they may need it later.
They transfer the stock to a 5 percent Stanford net income unitrust. Their charitable contribution deduction of about $93,600 (based on an IRS discount rate of 4.6 percent) gives them an immediate federal income tax savings of roughly $32,700, and they avoid paying immediately the $67,500 federal capital gains tax. Their net cost of establishing the $500,000 trust (as opposed to selling the stock and reinvesting the proceeds) is approximately $399,700.
Until the Georges are in need of income, the trust assets can be invested for capital growth. Later, such as after retirement, when Mr. and Mrs. George would like more income, the trust assets can be invested for the production of income, resulting in a greater payout to them. If they have included a "make up" provision for the trust, and trust income in the later years exceeds 5 percent, Mr. and Mrs. George will also receive the excess income until all amounts necessary to "make up" for shortfalls in the payment of 5 percent of the value of the trust in earlier years have been paid.