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Wednesday, May 1, 2024
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Case Studies |
Death and Taxes - The Madison Era of Giving, Part 6 of 7
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Case:
While George Madison, Jr., repeatedly demonstrated his willingness to give, his younger brother Frank Madison, 75, was another story. In short, Frank was never the "giving" type. He believed only the super-rich, like his brother George, gave to charity, since they were the only ones well off enough to "throw money away." Frank did not consider himself rich because his estate was valued at a mere $3,000,000. Consequently, Frank had never made any kind of charitable gift. Frank's unshakable and outspoken beliefs about giving had not surprisingly earned him the nickname Ebenezer. However, even Ebenezer Scrooge had a change of heart when given the right circumstances.
Question:
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 was $26,000 per year. Grandpa George desired to alleviate this financial burden and, if possible, provide himself with tax benefits as well.
Solution:
After a conversation with George one night, Frank was amazed at the tax benefits associated with "special tax-favored trusts." George did not use the word "charitable remainder trusts" purposely. Frank, in particular, wanted to partake of the income tax deduction and bypass of gain George had received from his "special trust." Frank was utterly amazed the government would allow such a trust.
Thinking quickly, Frank thought he might have a good asset for a "special trust." Years ago, Frank paid $25,000 for a block of GE stock that is now worth $500,000. Frank wants to create a "special tax-favored trust" with his GE stock. He accepted that the trust must pass a 10% minimum deduction test. However, he still wanted as much from the trust as legally possible. Thus, he proposed to his attorney a trust that would pay 5% a year to him (75), his wife (75), his son (55), and his granddaughter (28). Frank's attorney told him this trust would just barely qualify, given the fact the trust would likely last 55 years. The trust would entitle Frank to a $51,000 income tax deduction and no capital gains would be due when Frank transferred the stock to the trust or when the trust sold the stock. In addition, Frank and his family would receive about $3.4 million from the trust. This figure, along with the other benefits, floored Frank. He immediately funded his "special trust." Frank never was bothered by the fact that charity would also benefit from his trust "someday," since he retained so many wonderful benefits. In reality, charity would receive approximately $2.4 million from the trust, but will not see that gift for over half a century.
Nevertheless, three years after funding his special trust, Frank was so truly pleased that he arranged to have his $1 million IRA pass into another "special trust" for the benefit of his three great-grandchildren. This latter trust would last for a term of 20 years. Bragging about his financial expertise, Frank even started encouraging his friends to create these special trusts. Ironically, no one, not even George, could break the news to Frank that he had turned into quite the "giving" type. George, however, never did call his younger brother Ebenezer from that point on.
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