Converting a Cabin into Long-term Security

By John Creahan

Russell and Kathryn are 60 and 59 years old, respectively, and have no children. Russell is a doctor, and Kathryn does not work outside of the home. They are deeply committed to their favorite charity and would like to make a significant gift.

They've owned a Montana cabin for years and years, but they rarely use it (basically never, these days). It's worth a little more than $400,000, with very low basis costs.

Russell would be happy to leave the cabin to your organization outright, but Kathryn objects—she's worried about her standard of living if Russell were to pass away before his expected retirement ten years from now. She would prefer to hang on to the cabin in case she needs to sell it to support herself. 

How can gift planning tools be used to fulfill their charitable goals and to ensure that Kathryn has sufficient income if Russell were to pass away?

Let's imagine that Russell and Kathryn transfer the cabin to a charitable remainder trust. There are many ways to structure this trust, but for our purposes, they elect to take a 6% unitrust payout. The trustee sells the cabin, leaving the trust with $400,000 after the cost of the sale.

Consequently, Russell and Kathryn receive approximately $24,000 per year (the total will fluctuate based on the increase or decrease in the value of the trust assets). Additionally, they get an income tax deduction of approximately $130,000. 

The $24,000 in additional income may be enough to make Kathryn comfortable. Alternatively, they could potentially use the annual payout to purchase life insurance and/or disability insurance to ensure that Kathryn is protected. Because Russell is in good health for his age, he could likely purchase a $1 million life insurance policy for under $20,000 per year. (If he bought a 10-year term policy, the annual cost would be even less.)

By converting a cabin they rarely use into a CRT, Russell and Kathryn can convert a $400,000 asset into a life insurance policy worth perhaps $1 million, while also making a substantial contribution to the charity they care about most deeply. Once again, a planned giving vehicle allowed the donors to realize their charitable goals while ensuring their own financial security.