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Saturday, April 27, 2024
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Case Studies |
Death and Taxes - The Madison Era of Giving, Part 2 of 7
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Case:
Still on an emotional high from his multi-million dollar gift toward the construction of a state-of-the-art library (see last week's Case Study), George Madison, Jr. has a new focus in his life - making a difference in children's lives. After making the gift to the school, George had a life-changing realization. George spent his entire life building up his business and accumulating his fortune and rarely gave of his time or money to others. Like many people, George's career and family were his number one priorities. Now nearing the latter part of his life, George feels a strong urgency to do things differently. Knowing the importance education played in his success, George strongly desires to set up gifts that would provide educational opportunities for underprivileged children. In addition, he would like to take full advantage of the tax benefits of making such a gift. While he is becoming more generous as of late, George has no interest in increasing his cash "donations" to Uncle Sam.
After discussions with the gift planner at a state university, George decides to fund a large scholarship endowment. He likes the benefits of charitable trusts, so George intends to set up a CRUT with $5 million of highly appreciated real estate. The gift planner explains that the trust could run for a term of years or for him and his wife's lifetime. George's original goal is to fund the endowment 10 years from now. Since he is unsure how long he and his wife will actually live, George opts for a term of years CRUT so that the gift will pass 10 years from now. George happily agrees to the plan and arranges to have his attorney draft the trust first thing in the morning.
Question:
While George's plans are lined with good intentions, his decision to choose a term of years CRUT over a two life CRUT has laid a potential estate tax trap for he and his wife. What is the trap and how can it be solved without detracting from George's charitable goals?
Solution:
The trap with George's term of years CRUT is the loss of the marital deduction under Sec. 2056. While only wishing that he and his wife receive benefits from this trust, there is the possibility that someone other than the surviving spouse can benefit from this trust. For example, if both George and his wife pass away within 10 years, the trust will still pay to either the estate or another named income beneficiary. Therefore, the danger is that if either George or his wife pass away within 10 years, a portion of the $5 million dollar CRUT (which most likely will have grown in value) will be subject to estate tax.
However, if George creates a lesser of two lives or 10 year term CRUT the result would be much different. Upon the first death, while the trust would still be subject to estate tax because of Sec. 2036, none of it will be taxed because the estate would be entitled to both a charitable and marital deduction for the full value of the CRUT includable in the decedent's estate. The marital deduction is saved, since no one other than the surviving spouse can benefit from the trust. George's attorney therefore recommends the lesser of 10 years or two lives CRUT. His attorney further states that if a gift in less than 10 years is George's goal he could still accomplish that as well. All George and his wife would have to do is relinquish their income rights in the trust, thereby terminating the trust and effectuating the gift. George is very happy with this idea and the flexibility it provides. He funds his CRUT later that month and is later honored by the university for his wonderful generosity. Having met his goals with his two gifts to schools, George now sees himself as a successful philanthropist and businessman - a new title he gladly wears.
On a final note, because the CRUT was being funded with an unmarketable asset, a "flip" provision will be added to the trust document.
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