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The donor gifts the asset to the trust
— $2,600,000 is gifted
to the charitable trust, possibly resulting in current charitable
income tax deduction of $2,000,000*
— $600,000 is subject to
gift taxes
*Based on Section 7520 rate of 2.8% |
|
Assumptions:
Existing Annuity $2,900,000
Cost Basis
$1,500,000
Gift Tax – Offset $300,000 annuity surrender
Income
Tax – Offset charitable deduction
| Planning Assumptions |
| Policy |
TransACE ® |
| Initial face amount |
$10,000,000 |
| Premium amount |
$2,183,328 |
| Premium frequency |
Single Pay |
| Number of Years |
1 |
| Gender/Age |
Female/69 |
| Underwriting Status |
Preferred Non-Smoker |
|
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Upon the insured’s death, trust
provides final payment to charity and trust beneficiary receives
remaining trust assets
— The trust provides the charity with a
final payout of $2,500,000 — Trust beneficiary receives the
remaining trust assets which include $7,500,000 from the
life insurance |
|
|
Trust purchases life insurance
and municipal bonds
— $2,183,328 purchases a TransACE® policy
insuring life or Mrs. Smith with a $10,000,000 guaranteed death
benefit
— $416,672 is invested in municipal bonds |
|
Municipal bonds provide an annual
income to the charity
Municipal bonds of $416,672 provide charity
with $25,000 of annual income. |
|
The donor gifts the asset to
the trust
— $1,000,000 is gifted to the charitable
trust, possibly resulting in current charitable income tax
deduction of $900,000*
— $100,000 is subject to gift taxes.
*Based on Section 7520 rate of 3.4% |
|
Assumptions:
IRA Income Tax – Offsets by Charitable Income
Tax Deduction
| Planning
Assumptions |
| Policy |
TransACE ® |
| Initial face amount |
$3,037,000 |
| Premium amount |
$900,000 |
| Premium frequency |
Single Pay |
| Number of Years |
1 |
| Gender/Age |
Male/70 |
| Underwriting Status |
Preferred Non-Smoker |
|
|
Upon the insured’s death,
trust provides final payment to charity and trust beneficiary
receives remaining trust assets
— The trust provides the charity with
a final payout of $1,450,000
— Trust beneficiary receives the remaining
trust assets which include $1,587,000 from the life insurance |
|
|
Trust purchases life insurance
and municipal bonds
— $900,000 purchases a TransACE ® policy
insuring life of John D. Client with a $3,037,000 guaranteed
death benefit
— $100,000 is invested in municipal bonds |
|
Municipal bonds provide an annual
income to the charity
Municipal bonds of $100,000 provide charity
with $5,000 of annual income. |
|
Brian is a sales executive of
a software company and is charitably inclined. Brian has
had a great year and recently received a year-end performance
bonus in the amount of $1 million. He does not need the
bonus to supplement his retirement plan and would like
to minimize the impact this bonus will likely have on his
income taxes.
Assuming a current and future total
state and federal income tax rate of 45%, and a current and
future federal estate tax and gift tax rate of 45%, how might
the enhanced Charitable Trust Strategy help Brian? |
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 |
| |
| 1 |
Based on a § 7520 rate of 3.2%. |
| 2 |
Based on 60-year-old make preferred
non-smoker. |
| 3 |
Creation of a policy with a large
single premium may result in a modified endowment contract (MEC).
MECs have certain income tax consequences in the event a withdrawal
or loan is taken on the policy. clients should consult their
tax advisor as to these income tax consequences. |
| 4 |
$250,000 subject to gift tax. |
|
|
 |
As
with other planning strategies,
this strategy is not a good fit for everyone.
Generally, the Enhanced Charitable Trust
strategy is suitable for:
— High net-worth individuals aged 60 or
older
— Recipients of large, non-recurring taxable
income, such as a lump-sum bonus or a commission check
— Individuals expecting a substantial proceeds
from the sale of a business or real estate.
— Retiree’s with substantial annuity, IRA
, or qualified plan balances |
Other
considerations to keep in mind
Because this is a grantor trust, the income
generated by the CLA T will be taxable to the grantor. Municipal
bonds are generally a good choice when selecting the fixed income
product to generate the annual income to the charity, since the
proceeds are federal income tax-free to the grantor.
Secondly, the remainder amount received
by the non-charitable trust beneficiary is subject to federal
gift tax. The amount subject to gift tax is based on the original
gift amount less the charitable income tax deduction.
| Original gift amount |
| –
Charitable tax deduction |
| Amount subject to
gift tax |
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This material was not intended or written
to be used, and cannot be used to avoid penalties imposed under
the Internal Revenue Code. This material was written to support
the promotion or marketing of the products, services, and/or
concepts addressed in this material. Anyone to whom this material
is promoted, marketed, or recommended should consult with and
rely solely on their own independent qualified tax advisors
regarding their particular situation and the concepts presented
here.
Discussions to the various planning strategies
and issues are based on our understanding of the applicable
federal income, gift, and estate tax laws in effect at the
time of publication. However, these laws are subject to interpretation
and change, and there is no guarantee that the relevant tax
authorities will agree with Transamerica’s views. Additionally,
the information presented here does not consider the impact
of applicable state laws upon clients and prospects.
Although care is taken in preparing this
material and presenting it accurately, Advanced Planning Group
disclaims any express or implied warranty as to the accuracy
of any material contained herein and any liability with respect
to it. This information is current as of July 2009. |
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