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Lisa Newfield & Philip T. Temple, White Plains lawyers, The Gift and Estate Tax Implications of Planned Gifts

PLANNED GIVING GROUP
OF
GREATER NEW YORK
THE GIFT AND ESTATE TAX
IMPLICATIONS OF PLANNED GIFTS
Wednesday, April 16, 2003
Lisa Newfield, Esq.
Philip T. Temple, Esq.
McCarthy, Fingar, Donovan, Drazen & Smith, LLP
11 Martine Avenue
White Plains, New York
(914) 946-3700
lnewfield@mfdds.com
ptemple@mfdds.comI. ESTATE TAX LAWS
A. Saving taxes should be considered after, not before, your overall objectives are
reviewed. First, and most important, what is best for you and your family apart from the tax
consequences? Then, how best can you shape your plan to achieve the maximum tax and probate
savings? The following background information will help you better understand the savings
available through wise planning.
B. Estate Tax Applicable Exclusion Amount -- Really a Credit.
(1) The Economic Growth and Tax Relief Reconciliation Act of 2001 (“2001
Act”) resulted in major changes in the estate tax laws. These changes are
effective from January 1, 2002 through December 31, 2010, after which
the estate tax law reverts back to existing law without regard to the 2001
Act.
(2) Under the 2001 Act, the estate tax applicable exclusion amount will
increase as follows:
$1,000,000 in 2002
$1,500,000 in 2004
$2,000,000 in 2006
$3,500,000 in 2009
(3) The exemption is really a credit equal to the tax on the applicable
exemption amount.
(4) The estate tax is repealed for persons dying in 2010 and current estate tax
law is reinstated for persons dying in year 2011 and thereafter.
(5) Under the 2001 Act the top estate tax rate is 50% and is reduced by 1%
each year until 2007 when it will remain at 45% until 2010.
C. Gross estate; all property in which decedent had interest at date of death
including:
(1) Real property worldwide
(2) Cash, Stocks and Bonds
1(3) Joint property
(i) Tenants by the entirety
(ii) Survivorship
(4) Annuities
(5) Life insurance proceeds in which decedent had any incident of ownership
even if payable to named beneficiary (IRC 2042) or interpolated terminal
reserve value of policy owned by decedent on another.
(6) Property over which decedent held retained life estate (IRC 2036),
reversionary interest (IRC 2037), general power of appointment (IRC
2041) or made a revocable transfer (IRC 2038).
D. Alternate Valuation (IRC 2032)
(1) Unless elected, all assets are valued as of decedent’s date of death.
(2) Alternate valuation may be elected on Form 706 even if filed late, but no
later than one year from due date, including extensions. Once elected, it is
irrevocable.
(3) Can only be elected if both the value of the gross estate and the total net
estate tax and the generation-skipping transfer tax will be decreased.
(4) If elected, applies to all assets in gross estate.
(5) Alternate value is value of property on date of distribution, sale, exchange
or other disposition out of estate within 6 months of date of death or value
of property remaining in estate 6 months after date of death.
E. Estate Tax Deductions.
(1) Debts of Decedent.
(2) Funeral and Administration Expenses.
(3) Charitable Gifts. Unlimited gift and estate tax charitable deductions are
allowed. Thus, charitable gifts and bequests fully deductible - no matter
how large.
2(4) Marital Deduction.
(i) Unlimited gift and estate tax marital deduction is allowed for
transfers between spouses.
(ii) Unlimited marital deduction also applies to transfers of community
property to spouse.
(iii) Old law allowed no marital deduction for “terminable interest”
given to spouse. Thus, a trust which provided income to spouse,
with remainder to children, did not qualify for marital deduction,
nor did a trust which gave spouse life estate coupled with limited
power of appointment. Exception: a trust which provided life
income to a spouse with general power of appointment did (and
continues to) qualify for marital deduction.
(iv) Law allows marital deduction for “qualified terminable interest,” a
so-called Q-tip interest.
(a) Generally, terminable interest is qualified if decedent's
executor (or donor) so elects and spouse receives qualifying
income interest for life which meets these conditions:
(1) Spouse must be entitled for life to all income from
entire or specified portion of interest, payable
annually or more frequently. Thus, income interests
granted for term of years, or life estates subject to
termination upon remarriage or occurrence of
specified event, will not qualify. Qualifying income
interests are not limited to those placed in trust.
(2) No person (including spouse) may hold power to
appoint any part of property subject to qualifying
income interest to any person other than spouse
during his or her life. This rule permits trustee to
invade corpus for benefit of spouse. Creation or
retention of any powers exercisable only at or after
death of spouse over all or a portion of corpus is
also permitted.
(b) If property subject to qualifying income interest is not
disposed of before death of surviving spouse, fair market
value of property, determined as of date of spouse's death
(or alternate valuation date, if so elected), will be included
in spouse’s gross estate.
3(c) Caution. In some cases, it may not be advisable to take full
advantage of marital deduction when increased exemption
is taken into account and combined estate tax on estates of
both spouses is considered.
F. Form 706 -- U.S. Estate Tax Return (Appendix A for first three pages) Form
attached.
(1) Pickup adjusted taxable gifts made during lifetime.
(2) A brisk stroll through the first three pages.
II. GIFT TAX LAWS
A. Annual Gift Tax Exclusion.
(1) Gift tax annual exclusion is now $11,000 per donee (as of 2002), but only
for gifts of present, not future, interest. Indexed for inflation; rounded
down to nearest $1,000. With gift-splitting, spouses can transfer total of
$22,000 (and more) per donee per year without gift tax (regardless of
which spouse’s property is used to make gift).
(2) Any amounts paid on behalf of any individual (a) as tuition to educational
organization or (b) as payment for individual's medical care will not be
considered a gift. Exclusion for medical expenses and tuition in addition
to $11,000 annual gift tax exclusion and is permitted without regard to
relationship between donor and donee.
B. Taxable Gifts.
(1) 2001 Act does NOT repeal the gift tax.
(2) The gift tax applicable exclusion amount increased to $1,000,000 on
January 1, 2002 and is frozen at that level.
(3) Top gift tax rate decreases with estate tax rate, but in 2010 is reduced to
35%.
(4) Gifts in trust after 2009 will be treated as completed gifts unless the trust
is treated as wholly owned by the Donor or the Donor's spouse.
4C. Form 709 -- U.S. Gift Tax Return (Appendix B for first four pages). Form is
attached.
(1) Transfer tax is cumulative.
(2) A quick walk through the gift tax calculation.
III. GENERATION SKIPPING TAX LAWS
A. Generation Skipping Transfer Tax ("GST") Exemption.
(1) As of January 1, 2003, the GST exemption amount is increased to
$1,120,000 due to the inflation adjustment. Under the 2001 Act, the GST
exemption amount will mirror the estate tax applicable exclusion amount.
This provision of the Act is effective for GST transfers after December 31,
2003.
(2) The GST tax rate will mirror the top estate tax rate.
(3) The GST tax is repealed as of January 1, 2010.
B. A GST tax is imposed on transfers, either directly or through a trust, to a "skip"
person (i.e. a person in a generation more than one generation below that of the
transferor non-related).
C. Three (3) types of transfers subject to GST tax:
(1) direct skips;
(2) taxable terminations; and
(3) taxable distribution.
IV. THE TRANSFER TAX RULES FOR PLANNED GIFTS
1. Inter Vivos Charitable Remainder Trusts (“CRT”):
A. One life -- Donor is sole beneficiary. Gift Tax.
(1) Only gift is gift of remainder interest to charity.
(2) Report on Gift Tax Return and claim (unlimited) charitable
deduction.
(3) No taxable gift.
5AA. One life -- Donor is sole beneficiary. Estate Tax.
(1) Value of CRT assets at date of death (or alternate valuation date)
includable in gross estate.
(2) That value qualifies for unlimited estate tax charitable deduction;
thus, it’s a wash and no estate tax is attributable to CRT assets.
B. One or more lives -- Donor is not the beneficiary. Gift Tax.
(1) Completed gift is made to the beneficiary(ies). Gift of present
interest that qualifies for annual exclusion.
(2) Amount of gift in excess of exclusion is taxable gift. Tentative tax
may be offset by available gift tax credit.
(3) If Donor retains right to revoke beneficiary's interest, no completed
gift is made on trust funding. Only the unitrust amount actually
paid to the beneficiary each year is a completed gift.
(4) If beneficiary is spouse:
(a) gift qualifies for gift tax marital deduction under special
rule for qualified remainder trust interests.
(b) if spouse is non-citizen, special rules apply. There’s no
marital deduction, but as of 2003, there is a $112,000 a year
exclusion, which is adjusted for inflation.
(5) Gift of remainder is made to charity; qualifies for gift tax charitable
deduction.
BB. One or more lives -- Donor is not a beneficiary. Estate Tax.
(1) If Donor did not retain right to revoke -- and he or she probably
shouldn’t have - then no part of CRT assets is includable in gross
estate. But, amount of adjusted taxable gift comes back for
purposes of calculating estate tax.
(2) If, however, Donor did retain that right, then value of CRT assets
includable in gross estate.
(3) If spouse is only beneficiary, spouse’s interest qualifies for estate
tax marital deduction under special rule.
6(4) Charitable remainder interest qualifies for estate tax charitable
deduction.
C. Two life: CRT funded with Donor’s Separate Property -- Donor is first
beneficiary. Gift Tax.
(1) Successor Beneficiary is spouse.
(a) Completed gift for value of survivorship interest unless
donor retains right to revoke (by Will only) successor
beneficiary’s right to payment. No reason to do so for gift
tax purposes.
(b) Gift to spouse qualifies for gift tax marital deduction under
special rule.
(c) Be careful: To qualify for marital deduction, spouse must
be the only other beneficiary.
(d) Gift of remainder is made to charity; qualifies for gift tax
charitable deduction.
(2) Successor Beneficiary is not spouse.
(a) Completed gift for value of survivorship interest is made to
successor beneficiary unless donor retains right (by Will
only) to revoke that beneficiary’s interest.
(b) Retained right does not change estate tax implications (see
below).
(c) Gift of remainder is made to charity; qualifies for gift tax
charitable deduction.
CC. Two-life CRT: funded with Donor’s separate property -- Donor is first
beneficiary. Estate Tax.
(1) Value of CRT assets at Donor’s death includable in gross estate.
(2) If spouse is only successor beneficiary, spouse’s interest qualifies
for estate tax marital deduction. But, if spouse is non-citizen,
there’s no marital deduction unless special form of marital
deduction trust (QDOT) is created.
7(3) If successor beneficiary is someone other than spouse, then value
of survivor interest will wind up being part of taxable estate.
(4) Charitable remainder interest qualifies for estate tax charitable
deduction.
D. Two life: CRT funded with jointly owned property -- Donors are spouses
and are the only beneficiaries. Gift Tax.
(1) Payments should be made jointly and then to survivor.
(2) Actuarially older spouse makes a gift to the actuarially younger
spouse for the value of the difference in their survivorship
interests.
(3) Gift qualifies for the gift tax marital deduction.
(4) Gift of remainder is made to charity; qualifies for gift tax charitable
deduction.
DD. Two-life: CRT funded with joint property and Donor-beneficiaries are
spouses. Estate Tax.
(1) Since it is qualified joint property (joint property held by spouses)
only one-half of value of CRT assets at death of first included in
that spouse’s gross estate.
(2) Interest of surviving spouse qualifies for estate tax marital
deduction.
(3) Charitable remainder interest qualifies for estate tax charitable
deduction.
(4) No estate taxes attributable to trust assets.
(5) At date of death of surviving spouse, full value of CRT assets
included in that estate. But, it’s a wash because the full value of
the CRT assets qualifies for the charitable deduction.
E. Two life: CRT funded with jointly owned property -- Donors are not
spouses. Gift Tax.
(1) Payments should be made jointly and then to survivor.
8(2) Actuarially older Donor makes a gift to the actuarially younger
Donor for the value of the difference in their survivorship interests.
(3) Since it’s gift of future interest, does not qualify for annual
exclusion.
(4) Taxable gift can be avoided by each of the joint tenants retaining
the right (by Will only) to revoke the survivor’s interest income in
one-half of the joint gift property.
(5) Gift of remainder is made to charity; qualifies for gift tax charitable
deduction.
EE. Two-life CRT funded with joint property and Donor-beneficiaries are not
spouses (e.g., siblings). Estate Tax.
(1) Generally, there is rebuttable presumption that full value of joint
assets belong in the estate of the first of the joint tenants to die.
(2) However, once joint assets transferred to irrevocable trust, rule
changes and only one-half of the value of those assets will be
included in the estate of the first joint tenant to die.
(3) The survivorship interest of the other Donor-beneficiary will be
part of the taxable estate.
(4) Charitable remainder interest qualifies for estate tax charitable
deduction.
(5) At later death of surviving joint tenant, one-half of the value of
CRT assets included in that estate, but estate will get fully
offsetting estate tax charitable deduction - resulting in wash.
2. Testamentary CRT: Estate tax:
A. Obviously no gift tax implications to creation of CRT at death.
B. Value of assets that will fund the CRT is, by definition, included in gross
estate.
C. CRT for benefit of spouse:
(1) Interest of surviving spouse qualifies for estate tax marital
deduction under special rule.
9(2) Charitable remainder interest qualifies for estate tax charitable
deduction.
(3) No estate taxes attributable to trust assets.
(4) At later death of surviving spouse, full value of CRT assets
included in that estate. But, it’s a wash because the full value of
the CRT assets qualifies for the charitable deduction.
D. CRT for benefit of non-spouse.
(1) Charitable remainder interest qualifies for estate tax charitable
deduction.
(2) Value of beneficiary’s interest will be part of taxable assets.
3. Pooled Income Funds:
A. Rules very much the same as for CRTs; a pooled fund is a form of CRT.
B. Main difference only in treatment of spouse’s income interest.
C. There is no special provision allowing a gift tax and estate tax marital
deduction. In order to obtain that deduction, the Donor (in inter vivos
situations) or the estate personal representative (in testamentary situations)
must elect QTIP treatment (see above).
4. Inter Vivos Charitable Gift Annuities:
A. One-life annuity: Donor is annuitant. Gift Tax.
(1) Gift to charity is gift of present interest. Therefore qualifies for
both the annual exclusion and the gift tax charitable deduction.
(2) Query: Does 1997 Act allow Donor to forego filing gift tax return
if gift value exceeds annual exclusion?
B. One life annuity -- Donor is not annuitant. Gift Tax.
(1) Gift to annuitant is a gift of a present interest and qualifies for
annual exclusion. Excess is taxable gift.
10(2) If annuitant is Donor’s spouse, qualifies for marital deduction. If
spouse is noncitizen, no marital deduction but there is $100,000 a
year exclusion, adjusted for inflation ($112,000 as of 2003).
(3) Gift to charity is gift of present interest. Therefore qualifies for
both the annual exclusion and the gift tax charitable deduction.
C. One life annuities. Estate Tax.
(1) Donor is sole annuitant; no amount is includable in gross
estate.
(2) One-life annuity for someone other than annuitant; no amount
is includable in gross estate except that amount of adjusted
taxable gift comes back for purposes of calculating tentative
estate tax.
D. Two-life annuity funded with Donor’s separate property; Donor is first
annuitant. Gift Tax.
(1) Two gifts made: one to charity for gift portion; other to survivor
annuitant of actuarial value of right to receive survivor annuity.
(2) If survivor annuitant is spouse, interest qualifies automatically for
QTIP treatment (if payment is joint and survivor) and marital
deduction. Problem where spouse is non-citizen.
(3) If payment is not joint and survivor, unclear if marital deduction
applies. Therefore, best to retain right to revoke.
(4) If survivor annuitant is not spouse, gift is one of future interest and,
therefore, no annual exclusion.
(5) Can avoid taxable gift by Donor retaining right to revoke survivor
annuitant’s payments. Unlike rule for CRTs, right can be exercised
by Will or during life.
E. Two-life annuity funded with Donor’s separate property; Donor is first
annuitant. Estate Tax.
(1) If survivor annuitant predeceases donor, no amount is
included in Donor’s gross estate.
(2) If the survivor annuitant does survive, include in Donor’s
gross estate the value of an annuity paying the provided
11amount to the survivor annuitant (based on his or her age at
death of Donor).
(3) If survivor is spouse, that value qualifies for the marital
deduction automatically under QTIP. But see caution above re
non-joint and survivor annuities.
F. Two-life annuity funded with joint property: annuitants are Donors. Gift
Tax.
(1) Again, two gifts made: one to charity for gift portion; other to
younger annuitant by older annuitant of difference in actuarial
values of right to receive survivor annuity.
(2) If survivor annuitant is spouse, interest qualifies automatically for
QTIP treatment (if payment is joint and survivor) and marital
deduction. Problem where spouse is non-citizen.
G. Two-life annuity funded with joint property: annuitants are Donors.
Estate Tax.
(1) At death of first, included in estate of first is value of one-half
of survivor annuity.
(2) If survivor annuitant is spouse, interest qualifies automatically
for QTIP treatment (if payment is joint and survivor) and
marital deduction. Problem where spouse is non-citizen.
H. Two-life annuity funded with joint property; annuitants are not donors
and receive payments successively. Gift Tax.
(1) Again, two gifts made: one to charity for gift portion; other to
annuitants for value of right to receive annuity.
(2) Gift to first annuitant qualifies for annual exclusion. Gift to
survivor annuitant is one of future interest and does not qualify
for annual exclusion.
I. Two-life annuity funded with joint property; annuitants are not
donors. Estate Tax. No amount is includable in gross estate except
that amount of adjusted taxable gift comes back for purposes of
calculating tentative estate tax.
125. Testamentary Gift Annuities -- Estate Tax:
A. The difference between the amount bequeathed to charity and the
actuarial value of the deferred annuity (calculated in the same manner
as for inter vivos annuity) qualifies for the estate tax charitable
deduction.
B. If annuitant is spouse, personal representative can elect QTIP and
claim marital deduction.
C. If QTIP elected, value of annuity interest would be included in
spouse’s estate, but for fact that value is zero because it terminates at
spouse’s death.
6. Inter-Vivos Deferred Payment Gift Annuities -- Gift Tax:
A. One-life: Donor is annuitant.
(1) Gift to charity qualifies for gift tax charitable deduction.
(2) It’s a gift of a present interest; so, if charitable gift exceeds
$11,000 exclusion, does gift tax return have to be filed? We
say no, but caution may dictate filing.
B. One-life: Donor is not annuitant.
(1) Two gifts made: one to charity for gift portion; other to
annuitant for present value of right to annuity.
(2) Gift to charity is gift of present interest and qualifies for
annual exclusion; excess qualifies for gift tax charitable
deduction.
(3) Gift to annuitant is gift of future interest; therefore, there
should be no annual exclusion.
(4) If annuitant is Donor’s spouse, not eligible for marital
deduction because spouse’s right to “income” is not
immediate.
(5) Planning thought: Consider making gift to spouse; then
spouse makes annuity gift.
C. Two-life deferred annuity funded with Donor’s separate property
where Donor is first annuitant.
13(1) Again, two gifts are made: one to charity for gift portion;
other to survivor annuitant.
(2) Gift to charity qualifies for annual exclusion and excess for
charitable deduction. Problem where spouse is non-citizen.
(3) Gift to survivor annuitant is gift of future interest and doesn’t
qualify for annual exclusion -- nor does it qualify for marital
deduction.
(4) Donor can retain right to revoke survivor annuitant’s right to
annuity to avoid gift tax implication.
D. Two-life deferred annuity funded with joint property:
(1) Actuarially older annuitant makes gift to actuarially younger
annuitant for value of difference in their respective survivor
interests.
(2) To avoid gift tax implications, each Donor should reserve right
to revoke other annuitant’s survivor interest.
(3) Gift to charity -- same as above.
(4) Even if Donors are spouses, gift tax treatment is same and
right to revoke should be retained.
7. Inter-Vivos Deferred Gift Annuities -- Estate Tax:
A. The difference between the amount bequeathed to charity and the
actuarial value of the deferred annuity (calculated in the same manner
as for inter vivos annuity) qualifies for the estate tax charitable
deduction.
B. If annuitant is spouse, personal representative should be able to elect
QTIP and claim marital deduction.
C. If QTIP elected, value of annuity interest would be included in
spouse’s estate, but for fact that value is zero because it terminates at
spouse’s death.
8. Irrevocable Transfer of Remainder Interest In Personal Residence or
Farm:
14A. Gift and estate tax rules should be the same as for CRTs, with the life
tenant’s interest and the charitable remainder interest treated as those
interests are treated in the CRT area.
B. Caveat: In some states, be careful that a mere right to occupancy
given to a surviving spouse may not be considered a true life estate
qualifying for the marital deduction.
9. Charitable Lead Trusts (“CLT”) -- Gift Tax:
A. Remember, most lead trusts are not created to generate income tax
charitable deduction because they are not grantor trusts; the
remainder, after the charitable lead interest, passes on to family
members or others.
B. Inter-vivos CLT -- Donor retains reversionary interest.
(1) Gift is made to charity for value of lead interest.
(2) Gift is one of present interest and qualifies for annual
exclusion; excess qualifies for charitable deduction; therefore
no gift tax implications.
C. Inter-vivos CLT -- Donor doesn’t retain reversion.
(1) Two gifts are made: First, gift of lead interest; then, gift of
non-charitable remainder interest.
(2) Charitable gift of value of lead interest qualifies for annual
exclusion and gift tax charitable deduction.
(3) Remainder gift is gift of future interest that does not qualify
for annual exclusion.
(4) Depending upon discount rate in effect, if the lead term and
payout is long enough and high enough, can eliminate taxable
gift by making the charitable lead interest equal 100%.
(5) If Donor retains power to select charitable beneficiaries, gift is
not complete. If someone else, for example the trustee, is
given that power, the gift is complete but a charitable
deduction is allowed; so it’s a wash.
1510. Charitable Lead Trusts -- Estate Tax:
A. Inter-vivos CLT where Donor retained the reversion: Donor’s gross
estate will include only the value of the reversionary interest. The
shorter the balance of the trust term, the greater is the amount
included.
B. Inter-vivos CLT where Donor did not retain reversion: No part of
trust assets included in gross estate. But value of the noncharitable
remainder on the date of gift is included in adjusted taxable gifts and,
therefore, comes into play for purposes of calculating the tentative
estate tax.
C. Caveat: If Donor retains certain rights: (i) power to designate
charitable beneficiaries; (ii) power to vote stock transferred to CLT;
or (iii) is officer or director of a private foundation to which the lead
interest is payable -- then entire value of CLT assets included in gross
estate. Estate gets a charitable deduction for then value of lead
interest.
11. Testamentary Lead Trusts:
A. Obviously no reversion can be kept.
B. Assets that will fund the CLT are, by definition, included in gross
estate.
C. Estate gets estate tax charitable deduction for value of lead interest;
thus only value of remainder is in taxable estate.
D. Assets get a stepped up basis eliminating much of capital gains
concerns from assets in CLT.
12. Generation-Skipping Transfer Tax:
A. Nobody understands it, but see III above.
B. Know that if a non-charitable beneficiary or remainderman is a skip
person, get help.
16CASE STUDY
Example where H dies in 2002 and W dies in 2005.
H has $3,000,000 estate. His wife W has a $3,000,000 estate of her own. H gives an amount
equal to the equivalent exemption to his children and the balance of his estate he gives to Wife,
which qualifies for the unlimited marital deduction. H dies in 2003; his wife then dies later in
2005, leaving her entire estate to their children. Here is what the estate tax computations would
look like:
H’s Estate
Gross estate $3,000,000
Less: Estimated
expenses -- at 5% $ 150,000
Marital deduction --
balance of estate less
$1,000,000 equivalent
exemption $1,850,000 $2,000,000
Taxable estate $1,000,000
Tentative federal estate tax $ 345,800
Less: Applicable credit amount $ 345,800
Federal estate tax -0-
W’s Estate
Her separate assets $3,000,000
Marital share from H $1,850,000
Gross Estate $4,850,000
Less: Estimated expenses -- at 5% $ 242,500
Less: NY State Estate Tax* $ 347,640
Taxable estate $4,259,860
Tentative federal estate tax $1,842,934
Less: Applicable credit amount $ 555,800
Federal estate tax $1,287,134
NY State estate tax $ 347,640
Total Tax $1,634,774
* As of 2005 the state death tax credit is repealed after which there will be a deduction for
death taxes actually paid to the state.
17Integrating Split-Interest Charitable Gifts Into the Estate Plan to Save Estate Tax
Assume that W is charitably inclined. Her Will divides her estate into two parts. With the first
part, she creates a 6% charitable remainder unitrust (furnishing a potential hedge against
inflation) providing payments to her children in equal shares for a term of 20 years after her
death. The other half is placed in a charitable lead trust providing for payment of 7.2% of the
initial value of the assets (a guaranteed annuity) to charity for a term of 20 years with the
remainder payable to children (or grandchildren) at the end of the 20 year term. Here is what the
estate tax calculation in W’s estate would look like using the April 2003 discount rate of 3.6%:
Gross estate $4,850,000
Less: Estimated expenses -- at 5% $ 242,500
Charitable deduction:
Gross principal into unitrust
of $2,303,750 x 29.879% factor $ 687,186.00
into lead annuity trust of
$2,303,750 x 100% factor $2,303,750.00
$2,990,936.00
Less:
Net charitable deduction* $2,883,572
NYS estate tax deduction** $ 79,723
Total deductions: $3,205,795
Taxable estate: $1,644,205
Tentative federal estate tax $ 620,692
Less: Applicable credit amount $ 555,800
Federal estate tax $ 64,892
NY State estate tax $ 79,723
Total Tax $ 144,615
The estate tax savings is $1,490,159
* Although the estate tax is only attributable to the non-charitable portion of unitrust, the gross
principal of each trust has been reduced by ½ of the estate tax, thereby reducing the gross
charitable deduction. The estate tax is determined by an interrelated calculation.
** As of 2005 the state death tax credit is repealed after which there will be a deduction for
death taxes actually paid to the state.
18APPENDIX ALisa M. Newfield is an associate with McCarthy, Fingar, Donovan, Drazen & Smith, LLP, in
White Plains, NY. Specializing as a trusts and estates attorney with a concentration in
planned giving. Ms. Newfield works with charitable organizations and their donors. She
received her JD from the University of Michigan and is a member of both the Trusts and
Estates section of The New York Bar Association and the Westchester Women’s Bar
Association.
Philip T. Temple is a partner with McCarthy, Fingar, Donovan, Drazen & Smith LLP in
White Plains, NY, where he focuses on planned giving matters and personal estate and trust
work. Mr. Temple is a member of the National Association of college and University
Attorneys, former chair of the Committee on Nonprofit Organizations, New York City Bar
Association, and is a founding faculty member of the American Institute for Philanthropic
Studies.