Marriott Marquis Hotel
New York, New York
PHILIP T. TEMPLE, ESQ.
McCarthy
Fingar LLP
White
Plains, New York
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) Term: 24 years
(with provision not to violate Rule Against Perpetuities).
(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 $3,000,000 estate. His wife W has a
$3,000,000 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 2005; his wife then dies later in 2005, leaving her
entire estate to their children. Here is
what the estate tax computations would look like:
H’s
Estate
Gross
estate $3,000,000
Less: Estimated
expenses
-- at 5% $ 150,000
Marital
deduction --
balance
of estate less
$1,000,000
NYS
exemption amount* $1,850,000 $2,000,000
Taxable
estate $1,000,000
Tentative
federal estate tax $ 345,800
Less: Applicable credit amount $ 345,800
Federal
estate tax -0-
W’s
Estate
Her
separate assets $3,000,000
Marital
share from H $1,850,000
Gross
Estate $4,850,000
Less: Estimated expenses -- at 5% $ 242,500
Taxable
estate $4,607,500
Tentative
federal estate tax $2,006,325
Less: Applicable credit amount $ 555,800
*No
state death tax credit available as of 2005 _________
Federal
estate tax $1,450,525
NYS
Death tax $ 354,360
Total
Estate Taxes $1,804,885
* limit exemption in this scenario to NYS maximum
exemption amount which is $1,000,000 in order
to
defer payment of NYS estate tax.
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 7.7% 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 2005 discount rate of 4.6%:
Gross
estate $4,850,000
Less: Estimated
expenses
-- at 5% $ 242,500
Gross
charitable deduction computation:
Gross
principal into unitrust
of
$2,303,750 x 30.052% factor $ 692,323
into
lead annuity trust of
$2,303,750
x 100% factor $2,303,750
$2,996,073
Less: Estate tax payable* $
225,359
Net
charitable deduction $2,770,715
Total
deductions: $3,013,215
Taxable
estate: $1,836,785
Tentative
federal estate tax $ 750,350
Less: Applicable credit amount $ 555,800
Federal
estate tax $ 194,550
NYS
death tax $ 102,078
Total
taxes paid $ 296,628
The
estate tax savings is $1,508,257
*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.