|
Monday, May 6, 2024
 |
Case Studies |
Preserving the Family's Social Capital
|
Case:
Lorraine Moore, a widow age 75, has an estate valued at $1million. Her estate consists of her home valued at $100,000, liquid investments of $400,000 consisting primarily of bonds and some stock, and an apartment building valued at $500,000. As a former high school history teacher, she lives comfortably with her pension and the income from her investments. The apartment building generates an income stream of about $20,000 per year after expenses. However the property is continuing to age and with recurring repairs, she is growing tired of dealing with the responsibilities of the day to day management. Her husband passed away five years ago and he actually enjoyed taking care of the property during his retirement. He knew many of the tenants personally and in many cases was the handyman who handled most of the repairs.
Lorraine has lived in Fargo, North Dakota most of her life, but would like to purchase winter home in Arizona to escape the harsh winters. However, the management of the apartment building has kept her tied closely to the property. She has fully depreciated the building and her basis in the property is only $25,000 represented by the original cost of the land. She thought about selling the apartments a number of times, but was always discouraged by her CPA due to the capital gains tax problems. Lorraine just never could justify paying over $100,000 in tax to sell the property. Apart from the tax bite, she would love to unload the property and be free from its burdensome responsibilities. In fact, she recently received a tentative offer of $500,000 on the apartments and even though she has not formally accepted the offer, is seriously considering selling.
Lorraine has continued in her retirement to be active in tutoring high school students at the private high school where she taught many years ago. She has made contributions to the school and to other community-related organizations and would like to see some of her capital preserved for these types of organizations when she is gone. Lorraine's only son who teaches at the private school in Fargo has many of the same ambitions and charitable interests as she. She would like to see him have control of the some of the capital of her estate for charitable purposes after her passing.
Question:
Lorraine's desire is to sell the apartment building, but she would like to avoid the capital gains tax. Because she is receiving income from the property, she would like to continue to receive income from the sales proceeds. Lastly, she would like to see her family retain some control over the proceeds of the sale when she is gone. In other words, Lorraine would like to see the family control the estate's "social capital."
Solution:
She posed these questions to the Director of Major Gifts, Timothy Carlson, at the local community foundation. Timothy stated that these concerns could all be addressed by using a charitable remainder trust. The charitable trust would be funded by the apartment building and then would be sold within the trust thereby bypassing the onerous capital gains taxes. Timothy stated that she would have the option to choose the distribution percentage on the trust. After discussing the options with her, Lorraine chose a payout percentage of 7%. Therefore, she would receive a charitable income tax deduction of approximately $265,000. And, because she chose a payout rate of 7%, she can expect to receive an annual distribution of $35,000 per year which, based upon projected trust earnings, will most likely increase in future years.
Lorraine was very impressed with these benefits - no hastle lifetime income, a tax deduction and capital gains bypass. But how would the trust preserve the family's social capital? Timothy replied by stating that the trust must have a charitable remainderman. In other words, when she passes away, the trust assets must then be transferred to a qualified charity. He suggested that the charity be the community foundation and, more specifically, a donor advised fund (DAF) under her family's name. Since her son has the same charitable interests as Lorraine, he would be given the right to direct those assets held by the DAF to various charities for a specified period of time, for example, for ten years. In this way, he would control the family's social capital for a number of years after Lorraine's passing.
Lorraine was delighted with the charitable remainder trust concept. She was able to fulfill not only her financial and tax-related goals, but was able to preserve her family's social capital as well.
|
|
|
|
