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Wednesday, May 8, 2024
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Case Studies |
Using a CRT to Provide Child Care
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Case:
Carolyn Adams, age 35, is about to have her first child. She and her husband, David, have been successful stockbrokers over the last 15 years and have accumulated an aggressive stock portfolio that is now valued at over $1.5 million. Carolyn and David have made the decision that Carolyn will not work outside the home for at least the first five years of the child's life. However, they are concerned that they have established a lifestyle that requires her income to make their budget. In fact, they just purchased a new home in an exclusive area of the city in which they live. Last year, each of them made $100,000 in commission income; but in crunching the numbers on the family budget, they feel that they can live comfortably on $150,000 per year. Assuming that David will continue to make at least $100,000 per year, they will need to find a way to replace at least $50,000 of Carolyn's annual income.
Carolyn and David have been avid philanthropists throughout their 15-year marriage. Both sets of parents set excellent examples for them in philanthropy and they have continued that tradition. Recently, they were approached by the Glenview Children's Hospital to make a major gift to the capital campaign of the hospital. The campaign is designed to raise $10 million to build a new wing for treating children who have contracted the AIDS virus. They have a very soft heart for the hospital and its mission and plan to have their new baby there as well.
Question:
Carolyn's and David's desire is to ultimately provide a $500,000 gift to the hospital. They would also like to make sure that Carolyn can be a "stay-at-home" mom during the first five years of their child's life. Also, they would like to give themselves some flexibility should Carolyn like to extend her time at home with the child past the five-year period.
Solution:
In discussing their plans with the hospital's Major Gifts Officer, Carolyn and David decided that they would establish a 10-year term charitable remainder annuity trust with $500,000 of their highly appreciated stock. Since their desire is to replace at least $50,000 of Carolyn's income, the payout rate they chose is 10%. Therefore, during the 10-year period, the trust will distribute to them $50,000 per year. They decided to choose a term of 10 years to give Carolyn the flexibility to extend her time at home with the child should she so desire.
The advantages to funding the trust are many. Carolyn and David will receive the desired $50,000 per year to replace Carolyn's income. They will bypass the capital gains tax on the highly appreciated stock and receive a charitable income tax deduction of $145,813. Based on their income tax bracket, the resultant tax savings will be in excess of $40,000. If the trustee of the charitable trust is able to invest the trust assets at an overall yield of at least 10%, their $500,000 gift to the hospital will be realized. Lastly, and probably the most important objective for Carolyn and David, is that Carolyn will be able to care for their child, as they desire, for the formative years of the child's life.
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