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Tuesday, May 7, 2024
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Case Studies |
Building a Bridge Supported by a Trust
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Case:
Raymond and Patti Steele, both age 60, are successful real estate investors. In 1985, they purchased a 20-acre parcel of land on the outskirts of town for $200,000. They have recently been approached by a local home builder who develops upscale retirement communities and desires to purchase this property as part of a master development plan. In previous conversations with the builder, the purchase price would probably be in the range of $40,000-$50,000 per acre.
Raymond, an electrical engineer, recently retired from his firm and, as a result of his service and long tenure with the firm, received a $250,000 retirement "bonus" from the company. Because of this bonus, they are in need of a tax deduction to minimize their tax burden for the current year. Raymond and Patti have been generous philanthropists over the years, having been involved in a number of local charities. They considered making a substantial outright gift to their favorite charity, Union Rescue Mission, in order to offset the bonus, but thought perhaps there was a more cost effective way of making the gift.
The Mission recently embarked on a $5 million capital campaign to build a new shelter for the homeless. The goal of the Mission is to raise at least $4 million of the funds currently and then finance the remaining $1 million through First Funds Bank over a a fifteen-year period. Raymond and Patti have considered making a substantial gift to the campaign - as much as $1 million. However, at the current time, they would not be able to part with this substantial sum but would like to consider some type of planned gift.
Question:
Can Raymond and Patti use the 20-acre parcel of land to make the gift to the Mission and retain an income stream for a period of time? What period of time should be selected in order to produce the required tax benefits?
Solution:
In consultation with the Major Gifts Director of the Mission and their advisors, Raymond and Patti decide to establish a 5% twelve-year term charitable remainder unitrust funded with the land. They decide to use twelve years primarily for three reasons: 1) Raymond and Patti both have excellent retirement plans. They have decided that they will both begin to take distributions from their plans beginning at age 72. Therefore, income from the trust for the next twelve years will provide a "bridge" of income until that age. 2) Assuming the land will be sold by the trust for $1 million, a 12-year trust will produce a tax deduction of $543,000, which will enable them to reduce their tax burden this year. 3) At the end of twelve years, the trust will terminate and all the trust assets will be distributed to the Mission. The Mission can then pay off the bank financing on the shelter.
Raymond and Patti are very pleased with the results of their gift. They will receive a substantial tax deduction to offset the retirement bonus. Any deduction which cannot be used this year (based on their adjusted gross income) can be used to offset income up to five additional tax years. They bypass capital gains tax on $800,000 of appreciation on the property. They receive income of $50,000+ per year until they reach age 72, when they begin to receive distributions from their retirement plans. Therefore, the trust provides a necessary "bridge" of income until retirement. Lastly, the Mission is able to pay off its loan before the end of the fifteen-year term.
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