Planned Giving

Your act of generosity, our longevity

With planned giving, you can provide long-lasting support for Boys & Girls Clubs of South Puget Sound while enjoying financial benefits for yourself.

Text Resize
Print
Email
Subsribe to RSS Feed

Friday September 21, 2018

Case of the Week

No Marital Deduction Needed

Case:

Keith and Karen Crosby, ages 75 and 72, own a parcel of undeveloped real estate that they have held since 1979. They purchased the property for $10,000 and the current fair market value is approximately $800,000. Their goal for this property was to transfer it to their two children upon their passing, but they could use more income now. Since their estate is approximately $3 million and each has an estate exemption of $11.18 million (total of $22.36 million), they are not facing estate taxes.

They have not considered selling the property because of the capital gains tax consequences, so they find themselves between a rock and a hard place on how to increase their income. They are both in relatively good health, but Keith did suffer a heart attack seven years ago and Karen recently suffered a minor stroke. They have both recovered nicely and are continuing to maintain an active lifestyle and travel fairly frequently.

Keith and Karen are active philanthropists and were recently presented an award honoring their years of service and financial support of their favorite local charity. They are interested in leaving a bequest to their favorite charity, but would also like to couple this gift with benefits for their children. Further, because they plan to travel more extensively in the future, additional income would be a worthwhile objective in their planning. In discussions with Susan Collins, the Director of Major Gifts at their charity, she explained the concept of funding a lifetime charitable remainder unitrust with their undeveloped real estate. Susan then suggested that they could replace the asset by purchasing insurance through a life insurance trust. By utilizing the "Crummey" powers, the insurance could pass to the children free of gift and estate tax.

Question:

Susan did not realize that because of Keith and Karen's health history, they may not qualify for life insurance. Therefore, since the replacement insurance idea is not available to Keith and Karen, is there some other method to transfer value to the children and also provide for charity?

Solution:

In a subsequent meeting with the Crosbys, Susan explained that there may be another way to fulfill their objectives. They could, for example, consider funding a unitrust that will last for their lifetimes. After they pass away, the unitrust would continue to distribute income to their children for a period of 15 years. In order to avoid any gift tax consequences, a testamentary power of revocation would be included in the unitrust document. However, even though there are no gift tax consequences, Keith and Karen will be required to include a portion of the trust corpus in their estates.

For example, assume Keith and Karen create a FLIP life-plus-term unitrust with jointly-held property. When Keith passes away, one-half of the value of the trust as of his date of death is includible in his estate (assuming he passes away first). A charitable estate tax deduction calculated on a one-life-plus-term trust will then be available on Keith's estate tax return. The net amount (one-half of the trust corpus minus the deduction) could be subject to potential estate taxation. Subsequently, when Karen passes away, a similar computation is performed on her one-half interest in the trust corpus with the charitable estate deduction calculated on the remaining term of years trust.

Susan also explained the potential impact of estate tax. If the unitrust paid only to Keith and Karen, it would qualify for the marital deduction in the first estate and the charitable deduction in the survivor's estate. But since the trust pays to children, there is no marital deduction. However, since Keith and Karen each have an exemption of $11.18 million, estate taxes will not be a problem.

Keith and Karen were both pleased with this planning option and decide to use the undeveloped land to fund a unitrust for their lives with an extended term payable to their children for an additional 15 years. They decide to choose a 5% payout. When the property is sold within the trust, they can expect to receive a distribution of $40,000 the first year with increasing distributions in future years if the trust investments yield more than 5%. They will bypass the capital gains taxes and receive an income tax deduction of more than $180,000. When they pass away, their children will receive 15 years of income from the trust, which, in total, will more than replace the property used to fund the trust initially.

Through the life-plus-term concept, Keith and Karen are able to fulfill all of their objectives - increased income for traveling, bypass of capital gains taxes, provision for their children and a substantial gift for their favorite charity.

Published July 6, 2018
Print
Email
Subsribe to RSS Feed

Previous Articles

The Gas Guzzler's Deduction, Part 3

The Gas Guzzler's Deduction, Part 2

The Gas Guzzler's Deduction, Part 1

Exit Strategies for Real Estate Investors, Part 17 The Double Deferral Solution

Exit Strategies for Real Estate Investors, Part 16

scriptsknown

Gift Options

Donor Stories

Learn how others have made an impact through their acts of giving to our organization and others. Explore the many benefits of charitable gift planning.

more

How to Give

Learn how to make a gift that provides tax benefits and even life income.

more

What to Give

Find out what type of assets make the best planned gifts. Learn about gifts of cash, securities and property.

more

Planned Gifts Calculator

View a presentation that shows the benefits of a planned gift based on your property and goals.

more

News

Personal Planner

Bequests to Your Favorite Charity Bequests to charity are the most popular type of planned gift. A donor may retain assets during life and then leave a...

more

Finance News

Hewlett-Packard Continues Resurgence Treasuries Rise on Mixed Economic Data Interest Rates Stay Low

Savvy Living

Personal Tech Products Designed Specifically for Seniors. Can you recommend any tablets, smartphones or computers that are specifically designed for seniors? I would like to buy...

more

Washington News

IRS End-of-Year Tax Tips

In IR-2014-110, the IRS offered tax tips for end-of-year charitable giving. 1. Household or Clothing Gifts ? These items must be in good used condition or better..

more

For Advisor

Advisor Resources

We have a complete tax update service for CPAs, attorneys, CLUs, CFPs, ChFCs, trust officers and other professional friends.

more

Deduction Calculator

The GiftLaw Calculator is a planned gifts calculator for professionals that follows the IRS format

more

Private Letter Ruling

Estate Distributes to Foundation without Self-Dealing

Decedent formed Company and subsequently formed Irrevocable Trust...

more

Washington News

IRS End-of-Year Tax Tips

In IR-2014-110, the IRS offered tax tips for end-of-year charitable giving. 1. Household or Clothing Gifts ? These items must be in good used condition or better.

more

GiftLaw Pro

Charitable Tax Reference

GiftLaw Pro is a complete charitable giving and tax information service inside the GiftLaw website...

more

Case of the Week

Living on the Edge, Part 4

Rhea Jones, 75, lives in a beautiful coastal town in northern California. Rhea?s home occupies three...

more

Article of the Month

Gifts of Pass-Through Business Interests

A charitable gift of a business interest can make a wonderful gift to charity. At the same time,...

more