Crowne Plaza Hotel
PHILIP T. TEMPLE, ESQ.
McCarthy
Fingar LLP
A. Charitable lead trusts. An
individual (“grantor”) can transfer assets to a charitable lead trust that is
either a grantor or non-grantor lead trust.
(1) If, for example, the Grantor provides a reversion for himself or his spouse, he will be taxed on the trust income during the trust term (a “grantor” trust) even though it is paid to charity, but he will be able to claim an income tax charitable contribution deduction for the calculated value of the charitable lead interest provided the trust is either:
(a)
a lead annuity trust paying charity a fixed annual sum for the trust
term; or
(b)
a lead unitrust paying charity a fixed percentage of
the value of the trust assets as revalued each year.
The Grantor will also be
entitled to a gift tax charitable deduction for the charitable lead interest.
(2)
Main drawback of law is that Donor cannot get the income tax charitable
deduction unless trust so drawn that he is taxed on income paid to charity -- a
grantor trust. Thus, except for very
wealthy individuals, charitable lead trust created during lifetime is generally
not advantageous. Some create trust with tax-exempt bonds so that income is not
taxable.
(3) If charitable beneficiary is public charity,
ceiling is 30% of adjusted gross income with a five year – 30% carry-over for
any excess contribution.
B. Testamentary or Inter Vivos
Lead Trusts. Lead trusts paying
income to charity are advantageous when created by Donor's will or during life time
where there is no reversion to Donor or his spouse (a “non-grantor” lead trust)
but the assets pass to others (i.e., children) at the end of the trust
term. Donor gets a gift tax charitable
deduction for the charitable lead interest thereby passing significant asset
value to the ultimate beneficiaries at minimum transfer tax cost. Similarly, an estate tax charitable deduction
is allowed for value of income stream paid to charity under lead trust created
by Donor's will. Again, to get the gift or estate tax charitable deduction,
charitable income interest must be guaranteed annuity (lead annuity trust) or
fixed percent of net fair market value of trust assets, determined yearly (lead
unitrust).
C. The JOLT -- Jackie Onassis lead trust. What she did for family, friends and charity.
(1) Entire residuary estate to a charitable lead trust:
(a)
(b) Payout: 8% of
initial fair market value.
(c) Beneficiaries:
Such qualified charities as independent trustees shall select.
(d) Remainderman:
Grandchildren in equal shares.
(2) Charitable deduction—approximately 96% of amount transferred.
(3) Taking care of family too.
(a) Trustee’s commissions.
(b) Learn Philanthropy.
(4) Illusionary - - but still great story.
D. Leveraging
the Charitable Deduction for GST Purposes.
(1) You determine the GST by multiplying the
top federal estate tax rate at the time the taxable event by an “inclusion
ratio.”
(2) The inclusion ratio is:
1 minus exemption allocated to transfer value
of property minus death taxes
minus charitable deduction
(3) Strategy
Ideally, donors should try
to make the applicable fraction equal 1/1 so that, when subtracted from 1, the
inclusion ratio will be 0. Or, if the
denominator of the applicable fraction is larger than the donor’s exemption,
the donor should make the fraction as large as possible, thereby reducing the
rate of tax imposed. Allocating the
exemption early in the game can, in effect, often shield appreciation on the
trust property by locking in an inclusion ratio based on the lower initial
value. Because the charitable deduction
reduces the denominator, it
can provide a significant GST
tax savings when used in connection with the GST exemption.
The major issue concerning
the numerator is the timing of the allocation of the $1.5 million
exemption. Valuation of the property
transferred determines the denominator.
When the inclusion ratio is zero, a transfer is exempt from the GST tax
and when it’s one, the entire transfer is subject to the tax. Once you value the property transferred to a
trust, for example, you can compute the denominator and allocate the GST
exemption to produce an inclusion ratio of zero and a GST tax of zero.
E. See case study attached.
H has $5,000,000 estate. His wife W has a $5,000,000 estate of her
own. H gives an amount equal to the equivalent exemption to his children and
the balance of his estate is set up in such a way as to obtain the unlimited
marital deduction. H dies in February
2006; his wife then dies later in 2006, leaving her entire estate to their
children. Here is what the estate tax
computations would look like:
H’s Estate
Gross estate $5,000,000
Less: Estimated
expenses -- at 5% $ 250,000
Marital deduction --
balance of estate less
$2,000,000 federal
exemption amount $2,750,000 $3,000,000
Taxable estate $2,000,000
Tentative federal estate tax $ 780,800
Less: Applicable credit amount $ 780,800
Federal estate tax -0-
W’s Estate
Her separate assets $5,000,000
Marital share from H $2,750,000
Gross Estate $7,750,000
Less: Estimated expenses -- at 5% $ 387,500
Taxable estate $7,362,500
Tentative federal estate tax $3,247,550
Less: Applicable credit amount $ 780,800
*No state death tax credit
available as of 2005 _________
Federal estate tax $2,466,750
2. Integrating Split-Interest Charitable Gifts Into the Estate Plan to Save Estate Tax
Assume that W is charitably
inclined. Her
Will divides her estate into two parts.
With the first part, she creates a 6% charitable remainder unitrust
(furnishing a potential hedge against inflation) providing payments to her
children in equal shares for a term of 20 years after her death. The other half is placed in a charitable lead
trust providing for payment of 8.2% of the initial value of the assets (a
guaranteed annuity) to charity for a term of 20 years with the remainder
payable to children (or grandchildren) at the end of the 20 year term. Here is what the estate tax calculation in
W’s estate would look like using the January 2006 discount rate of 5.4%:
Gross estate $7,750,000
Less: Estimated
expenses -- at 5% $ 387,500
Gross charitable deduction
computation:
Gross principal into unitrust
of $3,681,250 x 30.228% factor $1,112,768
into lead
annuity trust of
$3,681,250 x 100% factor $3,681,250
$4,974,018
Less: Estate tax payable* $
262,949
Net charitable deduction $4,531,069
Total deductions: $4,918,569
Taxable estate: $2,831,431
Tentative federal estate tax $1,163,258
Less: Applicable credit amount $ 780,800
Federal estate tax $ 382,458
The estate tax savings is
$2,084,292
*Tax attributable to
non-charitable portion of unitrust.
Gross principal of each trust is reduced by ½ of estate tax, thereby
reducing charitable deduction for each trust.
Estate tax is determined by interrelated calculation.