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Oliver is a successful business owner and father. He would like to start funding an inheritance plan for his two daughters and pass some assets to them during life in order to decrease the size of his taxable estate. Oliver has also been very involved as a donor and volunteer at his favorite charity. The charity is in the early stages of a large construction project and approached Oliver to see if he would be willing to provide funding. Oliver is interested in doing so, but he also wants to make sure that he provides for the charity after he passes away through a bequest gift and hopes to receive an estate tax deduction for the gift as well.
Oliver talks to his financial advisors and decides to transfer a building valued at $2,000,000 along with $500,000 cash to a charitable lead annuity trust. At Oliver's request, his advisor structures the trust so that it will make a 5% fixed payment to Oliver's favorite charity each year for 12 years. After the 12-year term, the appreciated principal will pass to his daughters. The lead trust will produce a gift tax deduction of $1,120,274. Between the deduction and the trust's estimated remainder value of $3,141,500, Oliver is able to able to meet his goal of transferring valuable assets to his daughters outside of his estate. In addition, Oliver receives personal satisfaction knowing that the annual $125,000 gifts from the lead trust will enable his favorite charity to move forward with its construction project.
Oliver also asks his advisor to include a $1,000,000 gift to the charity in his estate plan. This will reduce his estate taxes by producing a charitable estate tax deduction. This bequest will enable him to make a large impact by providing for his favorite charity's future needs.
Annie is 87 years old and lost her husband a few years ago. She has a very large estate and makes substantial gifts to her favorite charities every year. Last year, she revised her estate plan to include a testamentary charitable remainder unitrust. When Annie passes away, the remainder trust will make payments to her children for a term of 10 years, after which the trust balance will be distributed to the charity named in the trust agreement. (See last month's article for a discussion on testamentary unitrusts.)
Annie would like to find a strategy that allows her to continue making charitable gifts. She also wants to transfer a large inheritance to her children beyond the income that will be paid from the unitrust. In addition, she would like to reduce her tax bill this year and perhaps avoid gain on the sale of appreciated stock that she bought many years ago.
After meeting with her advisor, Annie decides to first make an outright gift of $100,000 of her appreciated stock to her favorite charity's current campaign. Annie will receive a deduction this year and will be able to bypass all of the capital gain on the stock. Note that because the stock is an appreciated property gift, her deduction will be limited to 30% of her AGI this year, but she will be able to carry forward the remaining deduction for up to an additional five years.
Second, Annie's attorney helps her draft a testamentary lead trust, which will be funded with $15,000,000 in assets from her estate. The unitrust and lead trust will work in tandem. The lead trust will make annual annuity payments of $750,000 to charity for a term of 10 years while the unitrust will make payments to Annie's children for 10 years. After 10 years, the unitrust assets will be distributed to charity and the lead trust remainder will be distributed to Annie's children. Her estate will also receive a $6,666,975 estate tax deduction based on the establishment of the lead trust. Annie is thrilled because she will be able to provide continued support to her favorite charities and to her children when she passes away. By combining the testamentary lead trust with the outright gift of appreciated stock, Annie is able to save on taxes today, reduce her estate costs and provide more wealth for her family and charity in the future.