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Saturday, April 27, 2024
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Case Studies |
Megan's CRUT - 'til Marriage Do Us Part
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Case:
Kali Billings, 85, is a retired writer. Besides being an accomplished publisher, she is an active philanthropist. Throughout her life, Kali frequently gave of her time and money to many charities. In fact, she plans on leaving the bulk of her $1,000,000 estate to three of her favorite charities. While her family is very important to her, she feels they are all very successful and financially well off. However, Kali is concerned about her adopted daughter, Megan. Megan is a single 30 year old teacher living in a small town. Her salary is quite modest (especially in comparison to her siblings) and the likelihood of any significant increase over time is unlikely. Kali wishes to support her while she is single and building her career but does not want to alienate her other children. Ideally, she wants to provide support for Megan until she marries or until Megan reaches an annual salary of $60,000, whichever comes first. Kali's goal is to help Megan until her financial position is more in line with her other siblings.
Question:
Is there a way for Kali to provide help for Megan for a limited time or, alternately, if circumstances require for an unlimited time?
Solution:
Kali's friend and local gift planner, Tiffany Becker, suggests a Charitable Remainder Unitrust. Tiffany describes a plan whereby Kali could transfer $400,000 of appreciated securities to a CRUT. The CRUT would have a 5% payout and be written to last for the lifetime of Megan. This would provide Megan with $20,000 of extra income each year with the possibility for growth if the trust assets returned more than 5%. However, the trust document would be written to take into account Kali's two contingencies - marriage or annual salary of $60,000.
Generally, CRUTs last for a term of years not to exceed 20 or for the lifetime of a beneficiary. Here, Kali wants to fund a trust that would last for Megan's lifetime unless a certain event occurred in which case the trust would cease. Sec. 664(f) states that certain qualified contingencies are permitted. The Code defines qualified contingency as any provision of a trust which provides that, upon the happening of a contingency, the CRUT payments will terminate not later than when such payments would otherwise have terminated under the trust. Megan's getting married or achieving a certain annual salary should fall within this section because neither event can extend the CRUT payments beyond Megan's lifetime. Kali is very pleased with this plan. She is able to provide help to Megan in a customized way and still leave the $400,000 trust principal, plus growth, to her favorite charities.
Tiffany did remind Kali that setting up a CRUT for another person would trigger a gift tax return. Based on age, payout, and the value of the trust, the taxable transfer amounted to approximately $340,000. However, since Kali has not made any taxable gifts during her lifetime, she can simply apply a portion of her gift exemption to the gift. Lastly, under Sec. 664(f)(2), the fact that the trust could terminate early (i.e., Megan marries) is not taken into account for calculation purposes. Hence, the calculation for income and gift tax purposes is unaffected because of the qualified contingency.
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