3.7.4 Income, Gift and Estate Tax

Case Studies on Income, Gift and Estate Tax

Death and Taxes - The Madison Era of Giving, Part 4 of 7:   George Madison, Jr., 78, owns several homes scattered across the world. During his younger years, he thoroughly enjoyed traveling and spending time at each home. However, his health has severely restricted his mobility. As a result, most of his vacation homes sit dormant and unused throughout the year. Furthermore, the cost to maintain all of the homes is quite staggering even to someone in George's financial position. Consequently, George - now an experienced "planned giver" - assumes there must be a way he can use his housing excess to benefit both charity and himself. After speaking with his attorney, Matthew Cohen, George decided to gift a remainder interest in his $4 million Hampton summer home. Mr. Cohen explained that this gift would produce a charitable income tax deduction of more than $2 million. While George would still be responsible for the maintenance, insurance and taxes on the home, the tax savings would greatly offset those costs. George likes the plan even more because it does not divest him of his right to use the home. In fact, George retains the right to use the Hampton home for the rest of his life. Not until his death would the home pass to the named charity. The only reservation George has is about the excessive income tax deduction. It is not that he does not like the size of the deduction, but given his current yearly income he is unable to use the $2 million deduction even if he carries it forward five years.

In-Debted to Charity:   Maria Gonzalez, 80, was a lifelong volunteer of a local homeless shelter. Most of Maria's contributions to the shelter consisted of her time, hard work and passion to help people. She made only modest financial contributions, because her charitable giving goal was to leave a large bequest at her death to the shelter. Her estate was valued at $1.4 million, which was comprised of a $400,000 home, $200,000 IRA and $800,000 of stocks. She desired to leave the stocks to her children at her death. The rest of her estate she wanted to leave to charity. Maria learned that leaving her IRA to charity would avoid income and estate taxes, which pleased her greatly. With respect to her home, Maria wanted the shelter to have it as well. As a result, her attorney suggested giving the remainder interest in her home to the shelter. This gift would provide Maria with an immediate income tax deduction, and the home would pass to the charity without having to go through probate. Moreover, it would allow Maria to live in her home for the rest of her life. However, six years ago, Maria took out a home equity loan to make improvements to her home; thus, she was concerned about the $20,000 remaining mortgage on her home. She had purchased the home for $50,000 about 40 years ago.

The Philandering Philanthropist, Part 2 of 4 - $2.5 Million Ranch to Charity:   John Doe, 77, is a self-made man. Deserted by his parents at a young age, John grew up in a boys' home and on the streets. At the age of 17, he moved to Texas to chase oil and women. With his street smarts and gritty determination, John made millions in the oil business as an arrogant and risk-taking maverick. His fortune with women, however, was not nearly as successful. In fact, John was married - and divorced - four times. To this day, John still claims it was "all their fault" and remains bitter toward his ex-wives. Yet, he continues to date and currently has several "girlfriends." Also, John has six children, but unfortunately, does not have any ongoing relationship with them. He contends that his children are spoiled and ungrateful because he gave them too much while they were growing up. More likely, John's poor relationships stem from the lack of any family structure in his youth and the minimal amount of support given to him as a child.

Rodeo Rider at the Great Roundup in the Sky:   Mac Swenson loved the great outdoors. He grew up in the Big Sky country of Montana. As soon as he could walk, Mac was on a pony.