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Monday, May 6, 2024
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Case Studies |
Going Beyond the Tax Benefits of a CRT
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Case:
Kevin and Kai Chapman, both professors at the local university, retired from full-time teaching a number of years ago. Kai still teaches on a part-time basis at least one class each semester. Kevin has also taught part-time up until last year when his health began to deteriorate. It has continued to deteriorate steadily the past few months and the prognosis is not favorable. Kevin is age 68 and Kai, is age 62.
Kevin and Kai live in northern Wisconsin and they have five children and ten grandchildren, most of whom live within a short driving distance of their home. About 10 years ago, they visited Palm Springs, California and decided that this would be an ideal place to retire. Therefore, upon a return visit, they decided to purchase an acre lot for $100,000 just on the outskirts of Palm Springs with the intention of building their "dream home" upon retirement. During the past ten years, a national home builder specializing in luxury custom homes recently purchased 50 acres around their property. The home builder has partitioned the property into acre lots which are now selling for as much as $500,000.
Unfortunately, since Kevin's health began deteriorating, he and Kai decided that it would be best to remain close to their children and grandchildren and, therefore, not retire in Southern California. Therefore, they would now like to consider selling their property, but were told by their CPA that they would be required to pay capital gains taxes (combined stated and federal) in the amount of $100,000. They certainly don't want to pay this onerous tax, as the most that they have ever paid in taxes to the government in any one year is about $10,000.
Kevin and Kai have always been generous people and over the years have supported the university through the annual fund. They have also felt an obligation to give back to their community and have created a Donor Advised Fund (DAF) at the community foundation. Since creating the DAF, they have given to a number of community projects and local organizations which will assist in providing their grandchildren with what they term as a "nicer and safer neighborhood in which to live." Even though they have given what they could over the years to these causes, they always felt that if they could make substantial gifts, they most certainly would. However, they know that they are people of modest means and, therefore, making substantial gifts remained a dream.
Question:
Is there a way for Kevin and Kai to use the property in Palm Springs to make a substantial gift to the charities they now support? Also, they would like to pass at least $100,000 to each of their five children upon their passing. Is there a way to accomplish both of these objectives?
Solution:
In meeting with the Director of Planned Gifts at the university, Kevin and Kai decide that the best course of action is to use the property to fund a one-life 7% charitable remainder unitrust which would pay lifetime income to Kai only since Kevin is in ill health. Then, in order to provide the children with $100,000 each upon their passing, a life insurance policy will be issued on Kai's life in the amount of $500,000. Since their estate is not large enough to be subject to estate taxes (assuming a Credit Shelter Trust is created upon Kevin's death), the decision was made not to create a life insurance trust, but for Kai to simply purchase the insurance and retain ownership of the policy. The insurance premiums can easily be paid using the tax savings and income from the unitrust.
Kevin and Kai made the decision to list the university as 50% remainderman of the trust and their DAF as the other 50% remainderman. On the DAF agreement, they have chosen to give their five children the ability to make charitable distributions from their DAF for five years after their passing. This will allow the children to continue their legacy of giving back to the community. Upon making the decision to list the university as a remainderman, they were very pleased to learn that the university was in the middle of a capital campaign to build a new library and had been given a matching grant from a private family foundation in the amount of $250,000. By making the 50% portion of the trust to the university irrevocable, Kevin and Kai enable the university to receive the matching grant and experience an immediate benefit of $250,000.
For all parties concerned, it was satisfying to see this entire case come together the way it did, because shortly after the trust was in place, Kevin passed away. Kai now shares with friends and family the conversation with Kevin in his final days regarding the charitable trust and all the good it will do. Kai states that nothing was ever mentioned of the tax benefits they received or the money they saved; the most important aspect was the gift.
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