| Luke has $1 million in publicly traded stock in which he has a cost basis of $200,000. Through a dividend yield of 2 percent, this stock provides Luke with an annual income of $20,000 before taxes. In order for Luke to achieve a higher income from this investment, he can either (a) sell the stock and reinvest or (b) contribute the stock to a charitable remainder trust, which will make payments to Luke over a specified period of time. Suppose Luke chooses to sell the stock and reinvest the proceeds. He will owe long-term capital gain tax of $120,000 ($1 million - $200,000 x 15%) plus any applicable state taxes. By investing the net proceeds of $880,000 (assuming no state tax) and drawing out 7 percent per year, Luke will have an annual income of $61,600 before taxes. By contrast, if Luke contributes the stock to a Charitable Remainder Trust (CRT), he receives an income tax deduction in the year of the gift. The trust sells the stock without incurring any capital gain taxes, and Luke draws an annual income of 7 percent of $1 million $70,000. Best of all, Luke gets to support his charitable giving goals. By contributing the stock to a charitable remainder trust, Luke not only makes a major gift to charity. He also receives about 14 percent more income than if he had sold the stock himself. |
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