A Great Way to Boost Retirement Income

Here's the problem: Physicians and others who earn significant incomes during their working years often find they have extra money they would like to set aside for their retirement. But because of the limitations on retirement plan contributions, they cannot save this money on a tax-advantaged basis.

The solution? One option to consider is a slight variation to a typical charitable remainder unitrust. "Charitable?" Yes, you'll ultimately make a gift to Gustavus Adolphus College. But you'll also be able to place in a trust money whose growth is tax-free to the trust, and you'll receive an income each year.

How It Works

In a typical charitable remainder unitrust, the donor places assets into a trust for Gustavus and immediately begins to receive an income from that trust for life. The amount of income is determined by the value of the principal in the trust, as it is revalued each year. A payout rate—often 5 percent to 7 percent—is determined when the trust is established. Thus, if a physician sets up a trust with $1 million and chooses a 6 percent payout, he or she will receive $60,000 in the first year, and then the payments will be 6 percent of the assets in the trust in every year following. The actual dollar amounts depend on the growth or shrinkage of the trust.

But unitrusts can provide flexibility that allows a person to put annual amounts in the trust and not be paid—at least initially—the percentage stated in the trust. In this way, the donor places money in the trust as often as desired, receives very little income during working years, and then has the option of receiving a larger income later (often at retirement). This allows the trust assets to build without taxation during the donor's working years, which provides a larger asset base for income to be paid during retirement.

An Example

Let's say a physician who is 45 years old places $25,000 in a 5 percent unitrust each year for the next 20 years. If the trust value grows by 7 percent each year, it will be worth slightly more than $1 million by the time the physician is ready to retire at the age of 65. (The key concept is that the trust's growth is tax-free.)

To accomplish this growth, the unitrust is invested to create only a small 2 percent annual income during the first 20 years. After that time, the trust will be reinvested for only 2 percent growth, with 7 percent annual income.

This means that for the first 20 years, the physician will receive a 2 percent payout (the actual income) instead of the stated 5 percent. However, after 20 years, the physician will receive not only the stated 5 percent income, but whatever extra income is available each year to "make up" for the years when less than 5 percent was received.

Gift Calculator See how a charitable remainder annuity trust can benefit you.

Gift Calculator See how a charitable remainder unitrust can benefit you.

Other Considerations

As with all trusts, the choice of the person or entity to serve as trustee is important. The donor, Gustavus or a third party may act as trustee. The trustee is responsible for implementing the long-term investment strategy, which (with favorable market conditions) can provide increased income to the physician over his or her lifetime. Also, the trustee is responsible for ensuring that the tax forms are prepared in accordance with IRS and state tax department requirements.

Finally, the idea of using a charitable remainder unitrust to accomplish the twin goals of supplementing retirement income and making a significant gift to Gustavus can be complex. Any donor who wishes to use this method should seek the advice of competent counsel, as well as that of an experienced financial planner who is knowledgeable in the intricacies associated with this type of sophisticated and creative planning. For more information, please contact Jackie Peterson at 507-933-7543 or jpeters9@gustavus.edu.

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