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Example: Charitable Remainder Trusts

Jack and Joanna Hillier (both 65 years of age) own a summer cottage in Michigan. Although they enjoy having the ability to share the cottage with family and friends and have a place to vacation, the cottage maintenance is expensive, time-consuming, and often a hassle. The cottage has a fair market value of $500,000 and is completely debt-free.

The Hilliers have been thinking about selling the cottage, taking the profit, and avoiding all the typical maintenance problems. However, the Hilliers' basis in the cottage is $150,000 and they would incur significant capital gains taxes in the sale.

Here’s how Jack and Joanna can transform their cottage into a lifetime income stream for them and make a significant gift to Wheaton College.

  • Jack and Joanna donate the cottage to a charitable remainder trust.
  • The trustee sells the cottage free of any taxes since the trust is tax-exempt.
  • The trustee reinvests the proceeds into a diversified portfolio.
  • The Hilliers receive a current charitable income tax deduction of approximately $167,000.
  • After the cottage is sold, Jack and Joanna receive an annual income of 5% of the fair market value of the trust assets, as revalued annually. Thus, their initial annual payment will be $25,000.
Charitable Remainder Trusts

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