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Saturday, May 4, 2024
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Case Studies |
Refund Due for Termination of "Single" Status, Part 3 of 3
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Case:
Steve Reid, 80, retired fifteen years ago after working most of his life as a product manager for a Fortune 500 company. At the age of 78, Steve, a widower, decided to move into a retirement community in south Florida. The retirement community required an entrance fee of $50,000 from all new residents. However, the fee would be refunded over time using an amortized schedule.
Soon after moving into the retirement community, Steve fell in love with another local resident, Eva, who was 80. After two years of courting, Steve and Eva married. Now Steve plans to move into Eva’s suite, because her suite has a much better view of the lake than Steve’s suite. As a result of the marriage and move, the retirement community will refund the remaining $40,000 balance to Steve.
At present, Steve and Eva have an estate worth $250,000 and they do not have any need for this money. In fact, Steve would be happy to give it to the retirement community that has brought him such happiness. However, his children prefer that he save this money for a “rainy day,” i.e., health related costs.
Question:
Is there a way Steve could save for a “rainy day” and ensure that the retirement community receives a substantial gift from his estate? What benefits would Steve and Eva receive from such a plan? What are the potential drawbacks?
Solution:
Because of their moderate estate size, preserving liquidity is an important objective for Steve and Eva. While Steve and Eva are likely to have sufficient income and savings for their lifetimes, it is possible that at some future date a medical problem could arise. If they spend down their assets, they could require federal benefits for long-term care. Since federal benefits for long-term care may be delayed for up to five years after making gifts or transfers, they should retain assets for their future needs.
Therefore, Steve and Eva should consider creating a revocable trust with the retirement community as the remainder beneficiary. When individuals have a moderate size estate, it is best to make testamentary gifts, rather than to transfer assets during life into an irrevocable trust.
With a revocable trust, income is usually distributed to the grantors. However, if sudden health problems arose, Steve and Eva could invade the trust principal for their benefit. Moreover, Steve and Eva may revoke the trust in whole or in part at any time. But when they pass away, the balance of the trust corpus will be transferred to the retirement community. This transfer will accordingly qualify for an estate tax charitable deduction.
One drawback to this plan is that this arrangement will not produce an income tax charitable deduction, unlike the solutions in Part 1 and Part 2, the NIMCRUT and the flexible deferred gift annuity solutions, respectively.
Steve likes the idea that his beloved retirement community could receive a large gift after Eva and his death. Furthermore, Steve’s children feel comfort knowing that their father and new mother will have some extra resources for a “rainy day.” Therefore, Steve and Eva happily fund their revocable trust on their one-month anniversary.
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