A Reminder About Remainders
- by Bob Natiello
Without Joseph Wharton’s $100,000 donation, the University of Pennsylvania might never have established its renowned business school. My personal net worth doesn’t permit me to match his generosity, but I am trying to raise more than that from other sources.
As a senior citizen, I have a number of friends who hold real estate in their investment portfolios. Often, these are income-producing properties valued at half a million dollars or more.
In a friendly, unobtrusive way, I’m always on the lookout for older owners, especially those who lack heirs. With no one to inherit their property, they provide fertile ground for planting the seed for a Penn Charitable Remainder Unitrust—or CRUT.
I approach them with a simple recommendation. If they’re interested in making their lives easier—with a guaranteed income stream—I suggest they start by determining the dollar value of their property. A local appraiser can perform the task for a few hundred dollars.
Assuming the owner donates the property to Penn at an appraised value of $550,000, the owner immediately qualifies for a federal income tax deduction. Penn, now in full ownership of the property, sells it to fund the CRUT. If the property is sold at a profit, the donor pays no tax on the capital gain.
Minus any selling costs and expenses, the CRUT is invested in a diversified portfolio managed by experts. For the remainder of the owner’s lifetime, he or she will receive regular income payments of 5 percent taxed at a favorable rate.
Assuming the CRUT is valued at $500,000, the donor’s 5 percent would yield $25,000 annually. In some cases, this could exceed the yearly rental income that had been generated by the property. If the donor lives another 23 years after the CRUT’s establishment, the 5 percent will have yielded more in actual dollars than the property’s original $550,000 assessed value. And all those years will have been enjoyed without the constant worries of t ‘n’ t—tenants and toilets.
Because Penn has now sold the property and converted it to cash, the 5 percent income payments are forever free of the property taxes and maintenance costs the donor had been required to pay while still in possession of the property.
In describing the CRUT’s benefits, I always emphasize an unexpected feature that holds a special appeal to a donor who might have doubts about leaving a large sum to a university.
While the donor is alive, Penn controls the CRUT. But after death, Penn will distribute up to half the CRUT to any donor-designated beneficiary. If, for example, the donor has an affection for music, the donor can stipulate that, upon death, half the CRUT can go to a local nonprofit opera league or symphony orchestra. The other half stays with Penn.
Gifts are vital to Wharton’s progress. They account for 20 percent of Wharton’s annual operating revenue. If you know a property owner with no heirs, consider discussing a CRUT with the staff of Wharton External Affairs.