Monday March 20, 2023
Case of the Week
Lead to Remainder Double Charitable Trust
Case:George Green was a man of humble beginnings. He was born in Nebraska and lived with his parents on their farm. George was a diligent student and was determined to become a successful business owner. George applied to several colleges and was accepted as a work-study student at a state college. He lived in the dorm and worked nights in the cafeteria. On weekends, he moonlighted as a waiter at a five-star restaurant.
George was both resourceful and determined to succeed. He started by buying a fixer-upper in a modest neighborhood and spent nights and weekends renovating, painting and repairing it. After everything was finished, he sold the house at a profit and hired two assistants. Within two years, George was regularly buying and renovating buildings. He also started to build homes and commercial buildings. Over the years, he continued to build and gradually acquired several valuable commercial buildings.
Early in his career, George met and married Linda. They raised two children, Susan and Clifton. Linda is a strong supporter of a local charity. George is now on the board and would like to help with a major project. The project will require a gift of $2,000,000 (structured as $200,000 per year for ten years) and will be named the Linda Green Center. George also wants to pass an inheritance on to their children Susan and Clifton.
As George and Linda discussed the inheritance with their attorney, Sharon, he noted, "We started with nothing. I want to give Susan and Clifton a good income, but no principal. I wish to avoid any estate tax. I support my government, but over the years I have faithfully supported my government!"
Question:One of their properties is a $4 million commercial building. It is fully leased with fixed payment leases. George wonders how to use this building to achieve his objectives. How can he fund the Linda Green Center and provide lifetime income for their children with no estate tax?
Solution:Sharon ponders the problem and responded, "George, I think that I have a solution. Let us consider a double charitable trust. We can transfer the building into a charitable lead trust and pay $200,000 to your favorite charity for ten years. After that time, the building can be placed in a two-life remainder trust for Susan and Clifton."
George responded, "Seems like a good idea. But tell me more about how it will work. How much is paid to our favorite charity? How much will Susan and Clifton receive?"
Sharon continued, "Your building is transferred into the ten-year lead trust. With very low interest rates, your lead trust produces a great gift tax deduction. The 5% net income from the building is paid to your favorite charity for ten years. That equals the $2,000,000 gift for the Linda Green Center. When you fund the trust, there is a charitable deduction and with your gift exemptions, you will pay no gift tax. After ten years, the building is projected to increase in value to $5.1 million. The lead trust then distributes it to a 5% charitable unitrust for the lifetimes of Susan and Clifton. In the unitrust, the building can be sold tax-free and the proceeds reinvested. With $5 million (net after sale costs) in the unitrust, the 5% payout is about $250,000, so each child will receive $125,000 per year for life. If the unitrust increases in value, their income will also increase. Over their lifetimes, Susan and Clifton each may receive over $5 million."
George and Linda were delighted with Sharon's plan for the double lead trust-unitrust. He exclaimed, "Linda and I love this plan! It helps build the Linda Green Center and still provides a fine lifetime inheritance for our children. Plus, we will have other assets to leave in a bequest to our favorite charity."
Published January 13, 2023
Lucky Lucy Lindstrom's Long Shot Unitrust
Lucky Lucy Lindstrom's Unitrust
Stock Unitrust Payouts to Donors
The Values-Based Charitable Remainder Trust