Tuesday July 16, 2019
No Marital Deduction Needed
Keith and Karen Crosby, ages 75 and 72, own a parcel of undeveloped real estate that they have held since 1979. They purchased the
property for $10,000 and the current fair market value is approximately $800,000. Their goal for this property was to transfer it to their two children upon
their passing, but they could use more income now. Since their estate is approximately $3 million and each has an estate exemption of $11.18 million (total
of $22.36 million), they are not facing estate taxes.
They have not considered selling the property because of the capital gains tax consequences, so they find themselves between a rock and a hard place on how
to increase their income. They are both in relatively good health, but Keith did suffer a heart attack seven years ago and Karen recently suffered a minor
stroke. They have both recovered nicely and are continuing to maintain an active lifestyle and travel fairly frequently.
Keith and Karen are active philanthropists and were recently presented an award honoring their years of service and financial support of their favorite
local charity. They are interested in leaving a bequest to their favorite charity, but would also like to couple this gift with benefits for their children.
Further, because they plan to travel more extensively in the future, additional income would be a worthwhile objective in their planning. In discussions
with Susan Collins, the Director of Major Gifts at their charity, she explained the concept of funding a lifetime charitable remainder unitrust with their
undeveloped real estate. Susan then suggested that they could replace the asset by purchasing insurance through a life insurance trust. By utilizing the
"Crummey" powers, the insurance could pass to the children free of gift and estate tax.
Susan did not realize that because of Keith and Karen's health history, they may not qualify for life insurance. Therefore,
since the replacement insurance idea is not available to Keith and Karen, is there some other method to transfer value to the children and also provide for
In a subsequent meeting with the Crosbys, Susan explained that there may be another way to fulfill their objectives. They could,
for example, consider funding a unitrust that will last for their lifetimes. After they pass away, the unitrust would continue to distribute income to their
children for a period of 15 years. In order to avoid any gift tax consequences, a testamentary power of revocation would be included in the unitrust
document. However, even though there are no gift tax consequences, Keith and Karen will be required to include a portion of the trust corpus in their
For example, assume Keith and Karen create a FLIP life-plus-term unitrust with jointly-held property. When Keith passes away, one-half of the value of the
trust as of his date of death is includible in his estate (assuming he passes away first). A charitable estate tax deduction calculated on a
one-life-plus-term trust will then be available on Keith's estate tax return. The net amount (one-half of the trust corpus minus the deduction) could be
subject to potential estate taxation. Subsequently, when Karen passes away, a similar computation is performed on her one-half interest in the trust corpus
with the charitable estate deduction calculated on the remaining term of years trust.
Susan also explained the potential impact of estate tax. If the unitrust paid only to Keith and Karen, it would qualify for the marital deduction in the
first estate and the charitable deduction in the survivor's estate. But since the trust pays to children, there is no marital deduction. However, since
Keith and Karen each have an exemption of $11.18 million, estate taxes will not be a problem.
Keith and Karen were both pleased with this planning option and decide to use the undeveloped land to fund a unitrust for their lives with an extended term
payable to their children for an additional 15 years. They decide to choose a 5% payout. When the property is sold within the trust, they can expect to
receive a distribution of $40,000 the first year with increasing distributions in future years if the trust investments yield more than 5%. They will bypass
the capital gains taxes and receive an income tax deduction of more than $180,000. When they pass away, their children will receive 15 years of income from
the trust, which, in total, will more than replace the property used to fund the trust initially.
Through the life-plus-term concept, Keith and Karen are able to fulfill all of their objectives - increased income for traveling, bypass of capital gains
taxes, provision for their children and a substantial gift for their favorite charity.
Published July 6, 2018