|
Sunday, April 28, 2024
 |
Case Studies |
A Combination GLAT and CRUT
|
Case:
Kenneth and Marie Dickerson, ages 55 and 50 respectively, recently sold their mortgage brokerage business, which they had built up over the past 20 years, for $2.5 million cash. Their cost basis in the business was only $100,000, and as a result, they will be required to report a large capital gain on the sale and, in turn, pay a substantial capital gains tax.
Kenneth and Marie currently have an estate of $5 million, including the cash from the recent sale, which is currently invested in a money market fund. The balance of the estate is broken down as follows:
| Stocks | $1,000,000 |
| Personal Residence | $ 500,000 |
| Investment Property | $ 500,000 |
| Bonds | $ 250,000 |
| Vacation Home | $ 500,000 |
The stock is highly appreciated, and most of it has a cost basis of 25% of current fair market value.
Kenneth and Marie are very philanthropic and are known throughout their community as generous and giving people. Over the years, they have made substantial contributions to various charities and now have been approached by the Director of Gift Planning at the local symphony to make a pledge to renovate the existing symphony hall. The project is expected to cost over $5 million, and they have been asked to make a contribution of $500,000 payable over a five-year period. Instead of simply giving $100,000 in cash and/or stock over each of the next five years, they would like to consider using planned giving techniques to fulfill their pledge. They would like to keep most of their assets "intact" to provide themselves with a comfortable retirement. Because of the large tax burden incurred as a result of the sale of their business, they want to generate a large tax deduction for the current year.
Question:
What are some planned giving techniques that may be available to help Kenneth and Marie meet these objectives?
Solution:
Upon meeting with the Director of Gift Planning, their attorney and their CPA, Kenneth and Marie decide to set up a two-part plan to fulfill these objectives. First of all, they decide to fund a Grantor Lead Annuity Trust (GLAT) for four years with cash of $1.5 million. The payout rate on the trust would be 5%, or $75,000 per year, which would be payable to the symphony. Since this is a grantor trust, all the trust income would be taxable to them. However, to alleviate this problem, the trust would purchase municipal bonds and, therefore, all trust income would be tax-exempt. The primary benefit of this arrangement is that Kenneth and Marie would receive a charitable income tax deduction of $259,600 this year, based upon the present value of the income stream to the charity over the four-year period. The other benefit is that the trust assets would be returned to them at the end of the trust term, i.e., four years.
Secondly, to replace some of the income "lost" to them as a result of funding the lead trust, Kenneth and Marie will transfer $200,000 of their highly appreciated stock to a five-year term charitable remainder unitrust with a payout rate of 10%. The trust will yield a charitable income tax deduction of $120,900 and will provide income to Kenneth and Marie over five years. Capital gains taxes on the stock will also be avoided as a result of selling the stock through the trust.
The benefits of the two trusts are many. First, Kenneth and Marie will report total income tax deductions of $380,500. Second, the symphony will receive $300,000 over the four-year term from the lead trust and approximately $200,000 from the remainder trust after five years, thus receiving the full benefit of Kenneth and Marie's desire to contribute $500,000. Finally, upon termination of the lead trust, the municipal bonds will pass to Kenneth and Marie, thus preserving that portion of their estate for retirement purposes.
|
|
|
|
