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SOME SAMPLE ESTATE PLANS:
#3—CHARITABLE GIVING

by Christopher G. Stoneman

This article will be concerned with charitable giving as an integral part of an estate plan

At 62, Michael is a wealthy bachelor and enthusiastic conservationist. He has been told that he is suffering from a rare disease which will probably carry him off within the next two or three years. He comes from a large family - he has three brothers and two sisters, all of whom with one exception are "well fixed," as are their children. The exception is a brother named Arthur, who is a Jesuit priest and as such has taken a vow of poverty. However, Arthur has made it clear to Michael that the order to which Arthur belongs, the Society of Jesus, is badly in need of financial assistance for program and infrastructural improvements at the inner city high school at which Arthur teaches.

Michael's estate - conservatively valued at approximately $8,000,000 - is made up primarily of marketable securities, several hundred acres of partially wooded unimproved real estate, and a majestic residence which overlooks the land. Michael has been approached on numerous occasions by people seeking to develop the acreage as a resort and has courteously sent them packing, thereby unintentionally causing some of them to return with renewed enthusiasm and even more succulent proposals.

Lengthy discussions with Michael culminate in the following plan. He wishes to make what he calls "token" gifts to his nieces and nephews, presently eight in number, and to about a dozen friends and employees. With his eye on perpetuity he expresses considerable initial interest in setting up a private foundation bearing his name which would hold the rest of his estate and make a public park out of his land; but after looking further into it he decides that it would be simpler and more efficient to involve an existing public charitable organization with experience in this type of project.

Accordingly, Michael broaches the park idea with Open Spaces, Inc. (OSI), a well-regarded conservation organization on whose board of trustees he had sat for many years, and a satisfactory arrangement is worked out between them. He places a substantial portion of his securities into a charitable remainder trust from which he will be paid an income for life and receive a sizeable income tax deduction for the year in which he funds the trust and possibly also for one or more subsequent "carry forward" years. OSI as "remainderman" is to receive the entire trust at his death. In his will he makes his bequests to his nieces and nephews and his friends and employees, and devises the great bulk of his land to OSI.

He leaves his residence, together with a selection of his securities as an endowment, in trust for the Jesuit order with the understanding that it will be used as a combination retreat house and summer camp accommodations for students at St. Xavier's, the school at which his brother teaches.

With this plan in effect at his death, Michael will have accomplished the disposition of his sizeable estate in accordance with his carefully thought-through wishes and at zero or close to zero gift- or death-tax cost. Thus, the charitable remainder trust, although includible in Michael's gross estate (because of his retained life income interest), will be fully deductible as a charitable contribution (because the entire remainder interest will pass to the Society). His devise of land and securities to OSI will be 100% deductible (there are no percentage limitations on the estate tax charitable contribution deduction). The gift of the residence and securities to the Society will be similarly deductible. And the individual gifts will be covered by his estate's $650,000 gift and estate tax exemption unless, of course, they aggregate more than that. Michael could, if he wished, start giving each of his nieces et al. up to $10,000 a year without tax consequences and could put a provision in his will saying the bequests to these individuals should be reduced by any gifts he has made to them during the period beginning with the signing of the will and ending at his death.

Now consider the situation of another charitably intentioned individual, Helen (55), who is the life beneficiary of an irrevocable trust established by her grandfather in 1954. The trust is slated to end at Helen's death at which time she has a testamentary power to appoint the trust principal as it is then constituted. The power is a broadly worded one, exercisable "by express reference in her duly probated will ... to appoint said principal, outright or in further trust, to or for the benefit of any persons or entities whatsoever other than her estate, her creditors or the creditors of her estate." If she fails to exercise the power the trust goes to her descendants or, if she has none, to the boarding school of her teens where she spent what she has ever since regarded as four of the most miserable years of her life.

Helen is properly advised that her power is a "limited" or "special" power, not a "general" one. This means that the trust property will not be subject to federal estate tax at her death. Put differently, it will not be included in her "gross estate".

In addition to her grandfather's estate, Helen has significant assets of her own which are in an investment advisory account at her bank. Almost unbelievably, she has made no will - a lack which stems at least partly from her great reluctance to deal with the fact of her mortality. But the thought that her school might benefit from her death - coupled with the highly unsatisfactory consequences of the recent intestacy of a close friend of hers (who had, as it happened, told Helen that she was going to leave her $50,000 - of which Helen never received a nickel) - have finally convinced her that she must act "responsibly" and bring herself to deal with her affairs, much as she would prefer to ignore them.

Helen's advisor asks her to concentrate first on how she would most like to have her estate be distributed, pointing out to her that for this purpose she should include her grandfather's trust as part of her disposable estate and that she should not worry at the outset about taxes. As her advisor puts it, "Don't let the tax tail wag the dog. First decide who you want to have benefit, then we'll talk about taxes and see how best to accomplish what you have in mind."

Helen is musically inclined and plays the harpsichord well enough to have made several concert appearances with a statewide symphony orchestra. Although she is unmarried and has no children, she knows of several talented youngsters of limited financial means. She decides to establish a scholarship fund right away which she may support during her lifetime and then name as beneficiary at her death. She would like also to set up a trust for her deceased older sister's son, Basil, who has had some serious psychiatric problems and is unlikely - so Helen believes - to regain the ability to be self-supporting. Basil is married with two young children and a third on the way, and Aunt Helen, who is also his godmother, has always had a very soft spot for him. How should she best set about achieving these twin goals? Here's what she tentatively comes up with.

Helen establishes a foundation whose main purpose will be to award scholarships to promising young musicians of good character and limited means. She starts the organization off with $50,000 and decides to use her uncle's trust to give it a major boost at the time of her death - when, at present values, it would receive approximately $1.75 million. Then, she figures, she can use the rest of her assets - those outside the trust - to pay the estate tax and put whatever is left into a trust for the impecunious Basil and his family. "Q.E.D.," Helen says to herself. At this point her advisor steps in and makes the following observations.

1. The idea of a scholarship fund private foundation is fine, although Helen could probably save herself quite a bit of work (at modest cost) if she used a community foundation which would administer the scholarship fund as a separate fund of the community foundation. In keeping with the common practice of such organizations, Helen would no doubt participate in the scholarship selection process.

2. The money going into the scholarship program at her death, Helen is further advised, should come principally, if not exclusively, from her own assets and not from her grandfather's trust. Reason: since Helen's grandfather's trust will not be included in her gross estate at her death, no charitable contribution deduction will be allowed on the estate tax return (one may not claim a charitable or marital deduction for transfers made out of nonincludible assets).

3. The funding of the trust for Basil and his family's benefit should come from the grandfather's trust. Appropriately enough, this trust is "grandfathered" from the generation-skipping transfer tax whose imposition would otherwise prove an expensive problem.

Christopher Stoneman

The complete list of Christopher Stoneman articles is: