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 your favorite charitable organizations. But you'll also be able to place money into a trust whose growth is tax-free to the trust, and from which you'll receive an income each year.

How It Works
In a typical charitable remainder unitrust, the donor places assets into a trust for charitable nonprofits 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 rateóoften 5 percent to 7 percentóis 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 paidóat least initiallyóthe 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.

Other Considerations
As with all trusts, the choice of the person or entity to serve as trustee is important. The donor, charitable nonprofits 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 charitable nonprofits 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.

Please contact Mary Ludwig, Development Director at 712-732-5127, for more information.

The information on this site is not intended as legal, tax or investment advice. For such advice, please consult an attorney, tax professional or investment professional.

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