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Friday, May 17, 2024
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Case Studies |
Marketing Ideas During Soft Markets and Dropping Interest Rates, Part 5 - Life Estate and Deferred Gift Annuity Combination
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Case:
Harold Henry, 77, is a very generous American. He is the stereotypical major donor that charities love to find. Coming from a wealthy and philanthropic background, Harold has given approximately $15 million to national and local charities over his lifetime. In addition, he currently sits on the boards of several charities and loves his role as a volunteer and donor.
With a $20 million estate, Harold's estate plan is very comprehensive and reviewed annually. Not surprisingly, Harold is always contemplating new gifts and tax-wise planning. In fact, during the past two years, Harold has been tinkering with the idea of giving the remainder interest in his $2 million home to one of his favorite charities. Harold loved the idea and the income and estate tax benefits associated with the gift. However, due to his busy schedule, he just has not found the time to complete the gift.
Fortunately, Harold's attorney, Stan Sutton, was aware of his gift intentions. Accordingly, Stan noticed the dropping applicable federal rates (AFR) this year and advised Harold that now may be the time to make the gift.
Question:
What advantage is there for making a gift of a remainder interest in a home during dropping interest rates? What window of opportunity exists for completing this gift? How much can Harold save by completing this gift now? Although very wealthy, Harold has anxiety over the current state of the economy. Therefore, Harold asks if there is any way to receive income, should the need arise?
Solution:
A gift of a remainder interest in a home produces a charitable income tax deduction equal to the actuarial value of the remainder interest. When computing the remainder interest value, an applicable federal rate must be used pursuant to Section 7520. With life estate arrangements, the lowest AFR produces the largest charitable income tax deduction.
With the recent low AFRs, it is a great time to complete a gift of a remainder interest in a home. For example, Harold's charitable deduction is approximately $1,345,000 when using the low AFR. However, if Harold had gifted his home when the AFR was higher, his deduction could be more than $150,000 less! Thus, assuming a 40% federal and state combined income tax rate, Harold could save an additional $63,000 just for completing the gift now while interest rates are low.
To accommodate Harold's "rainy day" wish, he exchanges his remainder interest of $1,345,000 for a flexible deferred gift annuity. Pursuant to the charity's request, Harold agrees to a remainder gift of $345,000, a flexible deferred gift annuity value of $1 million and a tentative beginning date five years from now. Because he probably will never need the payments, Harold may eventually give the annuity contract back to the charity for yet another deduction. However, Harold sleeps much easier at night knowing that the payouts option is there for him.
For this gift plan, Harold would receive an income tax deduction of $345,000 on the remainder gift and about $635,000 for the $1 million deferred gift annuity. Harold and Stan are delighted with the $980,000 charitable deduction.
Once Harold passes away, the home will pass to the charity without having to go through the probate process. Also, the value of the home would not be subject to any estate taxes. As a result of all these benefits, Harold informs Stan to start the gift process.
In the end, Harold lives up to his reputation as a generous major donor and a tax-wise planner. By taking advantage of the current state of the economy, Harold will make a wonderful gift to charity at just the right time.
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