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Sunday, April 28, 2024
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Case Studies |
Marketing Ideas During Soft Markets and Dropping Interest Rates, Part 7 - Relinquishing your CRAT
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Case:
After attending a planned giving presentation, Bill Braun created a charitable remainder annuity trust (CRAT). He liked the tax benefits of such a trust, but more importantly he liked the fixed payments each year. Bill's 7% CRAT was funded in April of 1995 with $500,000. At that time, the AFR (Applicable Federal Rate, a.k.a. Rate of the Month) was very high and thus the CRAT computation used the February AFR of 9.6%. As a result, Bill was entitled to a charitable income tax deduction of approximately $235,000 (47% of the original gift). For the past seven years, Bill happily received his $35,000 a year from this CRAT. In addition to this CRAT payment, Bill receives another $100,000 each year from his other investments and retirement plan. His financial needs have since changed and he no longer needs the income from the CRAT.
Question:
Bill wants to know the best way to lower his reportable income each year, make a current gift to his alma mater's capital campaign and generate a large tax deduction?
Solution:
The planned giving officer at Bill's alma mater informed Bill about the possibility of making a gift from his existing CRAT. Specifically, Bill would assign his entire interest in the CRAT to his alma mater. This act would result in the termination of the trust, and an immediate gift to the capital campaign. Furthermore, under the reasoning of PLR 9550026, Bill would be entitled to a charitable income tax deduction.
The deduction would be calculated using a new gift date, the current age of the donor, and a current AFR. Because the deduction would be based on the value of the annuity stream, not the remainder interest, the lowest AFR was most desirable. Consequently, Bill elected to use the May 3.2% rate. As a result, his 2008 charitable contribution was approximately $270,000 (54% of the original gift). Bill was astonished with the results. He transferred appreciated property worth $500,000, and, in the past 12 years, received over $420,000 of income and two tax deductions! This was truly a win-win for Bill and his alma mater.
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