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Sunday, April 28, 2024
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Case Studies |
Death and Taxes - The Madison Era of Giving, Part 7 of 7
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Case:
A legend in the business world and a recent star in the planned giving world, George Madison, Jr., truly represented the American spirit at its best. Sadly, George passed away in his sleep last month at the age of 80. He leaves behind his wonderful wife of 60 years, his three children, his eight grandchildren, his two faithful dogs and an estate valued at approximately $100 million. With such a large estate, George had completed a very comprehensive estate plan years ago. The only addition he had made to his plan was for the creation of a $6 million four-life charitable remainder unitrust (CRUT) two years ago (which produced a $1,350,000 charitable income tax deduction). George's 5% payout CRUT was drafted so that he received income for his life, and then, when he passed away, the income stream would be paid to his three children, equally, for their lifetimes. His wife, Stella, would inherit most of the estate, so George felt that she had adequate resources. Under the advice of counsel, George's CRUT document contained a testamentary power of revocation. This trust provision made the transfer to his children incomplete for gift tax purposes, thereby avoiding the imposition of any gift tax. However, as expected, he chose not to exercise his revocation power at death. Thus, his children's right to receive income is now vested and must be taken into account for estate tax purposes.
Question:
What is the estate tax consequence of George's CRUT, which named his three children as successor income beneficiaries? How is that tax computation calculated for purposes of George's estate tax return?
Solution:
The value of the entire trust would be included in George's estate under Sec. 2036(a), because George retained a right to receive income from his CRUT during his life. Fortunately, his estate is allowed a charitable estate tax deduction for the present value of the remainder interest under Sec. 2055. Therefore, the trust amount subject to estate tax would be the total value of the trust at date of death minus the charitable deduction computed at date of death (or the alternate valuation date).
In this case, George's $6 million CRUT was valued at $6.1 million at his death. Using this new value and the date of death as the measuring date (and the applicable federal rate for the new valuation date), the estate tax charitable deduction is $1,386,363. Consequently, $4,713,637 ($6,100,000-$1,386,363) is included in George's estate. Assuming a 45% tax rate, George's estate would pay $2,121,136.65 to Uncle Sam. However, if George applied his estate exemption equivalent to the taxable transfer, his tax liability on the unitrust income value would drop to zero.
Editor's Note: This case study illustrates the importance gift and estate tax planning plays when creating charitable remainder trusts to benefit others. Through proper charitable planning, advisors can often help defer, reduce and even eliminate transfer taxes. Note that if George had directed the unitrust to pay income first to Stella and then to the children, the Sec. 2056(b)(8) marital deduction would not apply. This deduction would apply only if Stella is the sole successor income recipient.
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