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Sunday, April 28, 2024
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Case Studies |
The Flexible CRT, Part 1
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Case:
Ted and Eleanor Reeves, 65 and 64, respectively, both sit on the board of the local hospital. They have been approached about making a substantial lead gift to the hospital. They spoke with Tom Johnson, the hospital's gift planner, about various types of gift planning vehicles. In particular, the Reeves were enthusiastic about the benefits of funding a two-life Charitable Remainder Unitrust. They had a large block of appreciated IBM stock (valued at $500,000 with a $100,000 cost basis) that could be used to fund the CRUT. In addition, Ted and Eleanor are in a 40% combined tax bracket, so they are in desperate need of tax deductions. The Reeves, as a result, suggest to Tom that a CRUT seemed like a good choice. While supportive of their choice, Tom reminded the Reeves that the eventual gift to the hospital would occur in approximately 25 years. Being on the board, the Reeves knew the needs of the hospital. They knew the hospital would like to see smaller current gifts yearly versus a very large gift 25 years from now. Tom suggested using a Grantor (or Non-Family) Charitable Lead Trust, because it would pay income yearly to the hospital and then the stock would revert back to the Reeves. It would provide a charitable tax deduction, however, it would not allow a tax-free sale and diversification of the IBM stock.
Question:
Confused, the Reeves ask if there is any way they could do it all. Specifically, they want a trust whereby they can sell the stock tax-free, diversify, but also provide yearly gifts to the hospital. What can Tom recommend to Ted and Eleanor?
Solution:
After reviewing the plan again, Tom suggests funding a NIMCRUT. The Reeves would transfer their IBM stock to the 5% NIMCRUT, thereby producing a very nice $175,000 charitable tax deduction. Just as importantly, the NIMCRUT will sell the block of IBM stock tax-free and reinvest the proceeds in a diversified fund. Finally, the trust would be invested for growth, and thus the trust would produce little, if any, net income. Therefore, Ted and Eleanor would not have to report any additional income at a time when they are already in the highest income tax bracket.
The Reeves are very pleased with this plan, but inquire about the hospital's needs. Tom then explains that the trust will be drafted to include a special provision. This special provision will allow the Reeves to make immediate distributions from their NIMCRUT to the hospital. As a result, the Reeves can elect to make yearly contributions to the hospital based upon its needs. In addition, the Reeves will be entitled to a charitable tax deduction for making such a contribution (based upon the reasoning of PLR 9550026). Ted and Eleanor are thrilled with this trust, which acts like both a CRT and CLT. Tom's solution was truly a wonderful fulfillment of the Reeves's objectives.
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