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Sunday, April 28, 2024
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Case Studies |
Death and Taxes - The Madison Era of Giving, Part 5 of 7
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Case:
Seasoned businessman and now major donor George Madison, Jr., has decided to turn his gift planning intentions inward. Feeling successful in his endeavors to help others obtain an education, he now wants to assure the same opportunities to his grandchildren. Specifically, he wants to help Maggie, 17, and Tony, 18, who are his two oldest grandchildren. Both Maggie and Tony will be attending private colleges in the fall with Maggie studying chemistry and Tony studying computer science. Their estimated cost of tuition, room and board is $26,000 per year each. Grandpa George desires to alleviate this financial burden and, if possible, provide himself with tax benefits as well.
Question:
How can George ensure that his grandchildren each receive $26,000 a year for four years and at the same time provide himself with tax benefits? Is there a way for Maggie and Tony to pay very little taxes on the $26,000 by taking advantage of current tax laws?
Solution:
After consulting with his attorney, George created two Charitable Remainder Education Annuity Trusts. Each trust had a term of four years with a 14.25% annuity payout. George then funded each Education Annuity Trust with $200,000 from his diversified portfolio of appreciated stock. Because the asset allocation of the contributed stock was already financially well balanced, the corporate trustee chose not to sell and reinvest the trust's assets. This decision therefore allowed all payments to Maggie and Tony to be taxed as capital gain income, since the Education Annuity Trust realized only capital gain income each year from the sale of its appreciated stocks. A key additional benefit was the fact that the capital gain income would be taxed at Maggie's and Tony's capital gains rates not George's.
Therefore, both Maggie and Tony received $28,500 ($200,000x14.25%) a year from their respective trusts. Because Maggie and Tony are in the 15% income tax bracket, their capital gains rate is a mere 5%. Considering the fact that George's capital gains rate is 15%, this plan produced a substantial income tax benefit. Consequently, Maggie and Tony would each receive over $26,000 after taxes, which is the amount they needed each year for college. The Charitable Remainder Education Annuity Trust therefore solved the schooling expense problem quite well.
As for the tax benefits to George, he received a nice charitable income tax deduction of $100,000 for each trust he established. Moreover, at the end of the trust term, each college would receive approximately $140,000. Not surprisingly, George was ecstatic that he had guaranteed a debt-free education to his grandchildren while providing charity and himself with financial rewards as well.
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