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Friday, May 3, 2024
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Case Studies |
The Philandering Philanthropist, Part 2 of 4 - $2.5 Million Ranch to Charity
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Case:
John Doe, 77, is a self-made man. Deserted by his parents at a young age, John grew up in a boys' home and on the streets. At the age of 17, he moved to Texas to chase oil and women. With his street smarts and gritty determination, John made millions in the oil business as an arrogant and risk-taking maverick. His fortune with women, however, was not nearly as successful. In fact, John was married - and divorced - four times. To this day, John still claims it was "all their fault" and remains bitter toward his ex-wives. Yet, he continues to date and currently has several "girlfriends." Also, John has six children, but unfortunately, does not have any ongoing relationship with them. He contends that his children are spoiled and ungrateful because he gave them too much while they were growing up. More likely, John's poor relationships stem from the lack of any family structure in his youth and the minimal amount of support given to him as a child.
John does have one love, though: for the boys' home that raised him. It is the one and only good memory from his childhood. It was his only family as a child. As a result, he has publicly supported the boys' home throughout his life and privately supported many of the people who touched his life while there.
Although his hours are nominal, John continues to draw a salary of $300,000 as CEO and President of his company. John's estate of $10 million consists of a $5 million closely held C corporation, a $2.5 million ranch, a $2 million IRA and $500,000 in personal property (i.e., Cadillac, art collection, antique gun collection, jewelry, etc.). John intends to leave his entire estate to the boys' home at his death. However, he would also like to make a major contribution now, so he can see the effects of his gift during his life.
Question:
John wants to know which assets he should give now and which assets he should give at death, as well as how to structure his gifts in order to make the best taxwise decisions.
Solution:
John told his attorney, Karen Bird, that he wants to live out his life on his ranch. In other words, he does not have any intention of selling the ranch during his lifetime. Therefore, Karen knew that transferring the ranch into a charitable remainder trust or gift annuity was not viable, since both situations would require the ranch to be sold and/or for John to move out.
Karen thus suggested two charitable options for John's ranch. First, his will could bequeath the ranch to the boys' home, or if the ranch was in John's living trust, the trust could transfer the deed to the boys' home at his death. Since he is also giving the rest of his estate to the boys' home, either strategy would produce a 100% charitable estate tax deduction, thereby avoiding any estate tax.
Second, John could transfer a remainder interest in his ranch to the boys' home. Pursuant to the Tax Code, an income tax deduction is allowed for gifts of a remainder interest in a home or farm. However, the gift of a remainder interest does not preclude John from remaining in the home for his lifetime. In fact, the transfer of the deed to the boys' home will specifically state that John reserves a life estate in the ranch. In addition, by making the transfer, John would receive a charitable income tax deduction of over $1.5 million. The deduction would be limited to 30% of John's AGI, or $90,000 per year (30% x $300,000). The deduction could be carried forward for five years, resulting in a total claimed deduction of $540,000 (assuming that John's income stays constant). Although almost $1 million of deduction is never used, John does not feel shortchanged because the gift did not adversely affect his lifestyle. Yet, it did provide a very substantial tax savings over the next six years.
Because he intended to leave the ranch to the boys' home, John opted for the gift of the remainder interest option. Simply, the transfer of the remainder interest option made the most sense. It provided a current income tax deduction, and the ranch would avoid having to go through probate (similar to the living trust option). It was the best of both worlds, in John's opinion!
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