A Case Study in Charitable Estate Planning

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). 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 28% tax bracket. The bonds' value also would be subject to federal estate tax.  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 will save considerable estate taxes. Sylvia liked the idea of reducing taxes, but was particularly pleased that her brothers would start receiving income from a larger asset pool. Most satisfying was her ability to provide about $620,000 (or more) to worthwhile causes when the trust ends.

A "Temporary Gift" That Beats Estate Taxes

Evelyn, age 70, 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. Evelyn has two daughters, ages 36 and 40.
   "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 $600,000 annually for 25 years to qualified organizations," he began. "At the end of the 25 years your daughters would receive all the trust assets. If the trust investments follow historic patterns, we would expect to have more than $20 million in the trust by that time, even with the $600,000 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 a large gift tax charitable deduction," he continued, "and there would be no estate tax on the trust assets either, even if the children eventually receive more than the original $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 ($15 million over 25 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.

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