Case # 4:      Capital Campaign

James J., has an estate of $4 million and has served as a volunteer on his university’s alumni committee for many years. The university is conducting a capital campaign and has asked James for a gift of $400,000.

He owns an appreciated parcel of development land worth $400,000 and is considering giving that land to the university. However, he is concerned that his nephews and nieces would not then receive the $400,000 as part of their inheritance. Fortunately, his trust planner suggests that James replace the $400,000 through an irrevocable insurance trust.

James then deeds the development land to the charity. Based upon a qualified appraisal, he receives a charitable deduction of $400,000. In his 35% tax bracket, his tax savings are $140,000 over four years. James transfers the $35,000 in tax savings each year for four years to the trust. Each of his four nephews and nieces holds a Crummey power that allows them respectively to withdraw one-fourth of the trust premium for a period of 30 days. After the 30 days passes, the power lapses and the funds may be used to acquire the insurance policy.

Since the irrevocable insurance trust is excluded from his estate and the life insurance will both increase in value and pay nontaxable proceeds to the nephews and nieces, James has created the “four-tax-benefit” plan.

• He bypasses the capital gain
• He receives an income tax deduction on the gift.
• The ILIT is free of both income and estate taxes.
• This plan allows James to make a major gift to the university’s capital campaign and still provide a generous inheritance to nephews and nieces.

James was impressed enough with the trust planner that he further decided to create a $1,500,000 charitable trust for his church.