Business News & Tips Alan S. Moore / L’Observateur / March 31, 1999There are many estate planning techniques that can help you reduce your estate tax liability when you pass an estate to your heirs. But what if youdon’t have any heirs? Or, what if you want to leave a large portion of your estate to a charitable, civic, alumni or religious organization? A charitable remainder trust is an estate planning tool that can help you make charitable gifts while reducing your taxable estate. As you will see,a charitable remainder trust has many other advantages as well.
Published 12:00 am Wednesday, March 31, 1999
Let’s assume that a 70 year old widow with no heirs, who needs as much income as possible, has stock with a current market value of $500,000.
The cost basis of the stock is $100,000 with a current dividend yield of 3%. Let’s also assume that this widow wants to leave this money tocharity, but she can’t afford to give up the cash flow from the stock, as low yielding as it is. In fact, she needs higher current income but does notwant to pay the capital gains tax she would incur from selling the stock.
What can she do? The widow should consider funding a charitable remainder trust and transferring the $500,000 in stock to the trust now. Because a charitableremainder trust is an irrevocable trust agreement, she has just made an irrevocable gift and has reduced her estate by at least $500,000. We say”at least” because not only is the $500,000 removed from the widow’s estate but from any future appreciation in the money as well. What’s more,she receives income from the trust for the rest of her life.
Since the trust is a charitable trust and a charity incurs no capital gain liability, the trust sells the low yielding stock with no immediate tax consequences to the widow. Since she chooses the annual income shewould like from the trust, she can increase her income to meet all of her cash flow needs. The income percentage paid from the trust (the payoutrate) is established in the trust document. The determining market valueused to calculate the income can be based on the beginning market value of the trust and never change (Annuity Trust), or the trust can be revalued each year and the income is based on the new market value (Unitrust). Ineither case, the payout rate will never change once it is established in the trust document. The widow receives the income stream from the trust forthe rest of her life.
An additional benefit available to the donor is a current income tax deduction for the amount of the present value of the future gift that is going to the charity upon the donor’s death. The charity receives the fullmarket value of the trust upon the death of the donor. Please consult yourprofessional advisor before taking any action.
(Alan Moore is a financial advisor at Legg Mason Wood Walker, Inc., asecurities brokerage and financial services firm and member of the New York Stock Exchange, Inc.)
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