Post Election Estate and Tax Planning

Now that we know who our 44th president will be, the landscape has become clear as to what our income and estate tax will be like under the new administration.

Under the current estate tax law, in addition to an unlimited marital deduction resulting in no tax on the death of the first spouse, each individual has the ability to transfer up to $2,000,000.00 tax free to individuals other than a spouse with that credit increasing to $3,500,000.00 effective January 1, 2009. The current law eliminates estate tax for the year 2010 with the reinstitution of the estate tax thereafter with various reductions to the unified credit in January 2011 and thereafter.

President-elect Obama has stated he supports a continuation of the estate tax as well as maintaining the higher unified credit of $3,500,000.00. The realities of the current financial crisis, two wars and the level of national debt, inevitably would have resulted in a continuation of the estate tax in some form regardless of the election’s outcome.

Although many of the Bush income tax cuts will remain in place, we will likely see an increase of income tax rates for higher wage earners and an increase in the capital gains tax. One obvious strategy to avoid capital gains tax is to sell highly appreciated assets before the end of this year to take advantage of the current tax rate. However, what if you own illiquid highly appreciated assets such as real estate or even a business that would be difficult to sell by the end of this year?

One significant tax planning tool is a charitable remainder trust (CRT). A CRT provides both income and estate tax relief. An individual can form a CRT and then transfer ownership of an asset (or multiple assets) into the CRT. Once the title to the asset has been transferred to the CRT, the Trustee of the CRT may sell the asset with no capital gain tax on any portion of the appreciation of the asset. A CRT can last for a certain term of years up to a maximum of 20 years or for the lifetime of the person forming the CRT. During the CRT's term, the Trustee pays a percentage of the CRT's assets to the individual forming the CRT. When the CRT expires, the remaining assets are then transferred to a charity or multiple charities as designated by the person forming the CRT. In addition, the person establishing the CRT receives a current charitable income tax deduction that can be carried forward for up to 5 years. Finally, the value of the CRTs assets are not includable in a deceased individual's estate for estate tax purposes. Therefore, there is no estate tax on the assets in the CRT.

While the thought of having proceeds being distributed from the CRT to a charity as opposed to ones relatives may be disconcerting, consider the following example:

Mr. Smith has real estate he intends to sell. He could transfer title of the real estate to the CRT without uncapping the property for real estate tax purposes pending sale. The property sells for $1,000,000.00 and the CRT's term is 20 years. The income to be paid would be 6% of the resulting sale proceeds which would be produced by the Trustee of the CRT investing the proceeds in securities. This income would be paid to Mr. Smith and any other designated beneficiary by him in the CRT if he died before the end of the 20 year term.

Given these facts, the total amount paid from the CRT to Mr. Smith or his designated beneficiaries over the 20 years would be approximately $1,400,000,000.00 (a return of the original value of the asset plus excess return) and the remainder interest which would be distributed to charities would be valued at approximately $632,000.00.

The income tax benefits of no capital gains tax, a current charitable deduction, plus excluding the remaining property from estate taxes is a very favorable result. In the example above, Mr. Smith to the extent he didn't need the income could also implement a gifting program to his children or others to further reduce the assets subject to the estate tax.

Please contact us at 231-271-4500 if you are interested in discussing the possibility of implementing a Charitable Remainder Trust as part of your overall estate plan.

The information contained in this publication is meant for informational purposes only and is not intended as legal advice. Laws and their application vary based upon a client’s unique facts and circumstances. Wright Penning & Beamer disclaims any responsibility for action taken in reliance on this publication without further consultation and analysis. For questions, please contact us at (231) 271-4500 or at