Personal Planning Ideas

Martha sat in her attorney's office describing her plans for the distribution of her estate.
   "Well, let's see now. I want to leave the crystal to my sister Harriet. I should do something for my brother Charles, although he's so successful he really doesn't need an inheritance from me. I'll just leave him a token of my affection - perhaps the grandfather clock from my husband's estate.
   "I want to provide generously for my son, Tim, and my daughter, Julie," Martha continued, "but I'm not sure it's necessary, or even a good idea, to leave them all of my estate. We taught them to work hard and be self-reliant and nothing should change that.
   "Now there are three others I need to tell you about . . . and they are very unusual," she added slyly. On hearing those words her attorney leaned closer and Martha went on:
   "Oh, yes. These people tell me they never have to pay income taxes. Not only that, I never have to pay gift taxes or estate taxes on anything I give to them. But here's what is even more interesting: Whenever I make gifts to them, I get to write it off on my income taxes! Martha smiled at her attorney's puzzled expression and finally confided that these "people" actually were several worthwhile not-for-profit organizations (including us).
   Increasingly, people like Martha are telling their advisers: "My children are grown, educated and on their own. I have given them a good start in life. I want to provide for them after my death but I don't feel I need to leave my children everything.
   "I would do them no favors by giving them an instant fortune. I've worked hard; I've been successful; life's been good to me. Now I want to give something back. I want to do something for humanity. It's a matter of my personal philosophy."
   For these individuals, their charitable beneficiaries - school, house of worship, health institution, social service organization, cultural foundation or others - may be every bit as important as the "natural" objects of their bounty. And if that's the case, then some remarkable estate planning ideas are possible. Our staff would be pleased to help explore ways by which you can add immense personal satisfaction to your plans - plans that make the statement: "I was here; my life was important . . . I made a difference."

Occasionally one hears of a situation that evokes the thought: "This is what estate planning is all about!" Sylvia is a 77-year-old retired teacher who has always lived frugally. She has amassed, through purchase and inheritance, the sum of just over $620,000 in U.S. savings bonds (Series E and EE). Her estate, including the bonds, totals approximately $2,300,000. She's unmarried, but has three brothers she wants to benefit. She also told her attorney she wants to provide for our future and other important organizations.
Sylvia's attorney didn't know the exact amount of unreported interest tied up in the savings bonds, but estimated that it exceeded $300,000. He explained to Sylvia that the bonds will be taxable in her estate or in the hands of family members who receive the bonds – meaning they will be subject to income tax on all accumulated interest. More than $80,000 would be lost in federal income taxes alone, assuming heirs are in a 30% tax bracket. If she were to die in 2008, part of the bonds' value also would be subject to federal estate tax, since her total estate exceeds the $2 million currently sheltered by the estate tax credit. Solution? Sylvia's attorney suggested she establish a charitable remainder unitrust in her will and specify that the trust will be funded with the savings bonds. The trust would last for 20 years and make payments to her brothers (or to the children of any brother who dies prior to termination of the trust). Tax results?
"First of all," her attorney explained, "there won't be any income taxes on the savings bonds when they are cashed in by the trustee, because the unitrust is tax exempt. The interest on the bonds will be passed through to your brothers as part of their annual unitrust payments and taxed as ordinary income. But the trust doesn't lose anything to tax. Furthermore, your estate is entitled to an estate tax charitable deduction. If the trust has a 6% payout, roughly 30% of the bonds' value will be a deductible bequest ($180,000). That deduction, plus reasonable estate settlement costs, will reduce your taxable estate below the $2 million that currently is sheltered by your estate tax credit. "Sylvia liked the idea of eliminating taxes, but was particularly pleased that her brothers would start receiving income from a larger asset pool. Most satisfying was her ability to provide $620,000 (or more) to worthwhile causes when the trust ends.

Evelyn, age 76, worked side-by-side with her husband, Raymond, in the printing business for nearly 40 years. They sold the business for $16 million several years before Raymond's death, and Evelyn never remarried. Her own health is reasonably good, but she isn't confident she will live until 2010, when the estate tax is repealed . . . at least temporarily. Evelyn has two daughters, ages 46 and 42.
   "I want to make sure my children don't lose too much to death taxes when I'm gone," Evelyn said to her attorney, "and I'd also like to do something in Ray's memory."
   Her attorney was familiar with a special charitable giving plan called the charitable lead trust that has a unique ability to reduce or eliminate gift and estate taxes. He put together some "what-if" numbers for Evelyn:
   "You could transfer, say, $10 million of securities to a trust that will pay exactly $700,000 annually for 18 years to qualified organizations," he began. "At the end of the 18 years your daughters would receive all the trust assets. If the trust investments follow historic patterns, we would expect to have more than $10 million in the trust by that time, even with the $700,000 payout to charity. Of course, there are no guarantees.
   "There would be a gift tax return to file, but you wouldn't owe any tax because of your $1 million exemption," he continued, "and there would be no estate tax on the trust assets either, even if the children eventually receive more than $10 million."
   Evelyn replied that she liked the idea of relocating a large part of her estate out of range of estate taxes, especially when it meant a huge bequest to support our organization ($12.6 million over 18 years), all in Raymond's memory.
   Not many people share Evelyn's tax problems, but please contact our office if a charitable lead trust might make sense in your planning.