Probate & Trust Law Section Conference Manual ... - Minnesota CLE

A CRT can result in greater total value than selling assets outright
Cash flow example = $5,000,000 asset, annual pre-tax CRUT payment = 5%
Selling outright
Year Grantor Trust/Charity Grantor Year $ %
0 Net proceeds of sale $3,810,824 $5,000,000 1 $164,642 3.3%
Benefit of charitable deduction* $1,145,871 2 $166,939 3.3%
3 $169,268 3.4%
15 Account balance 7,119,275 6,154,986 5,763,666 4 $171,630 3.4%
Estate tax on account balance (3,531,160) 0 (2,858,778) 5 $174,024 3.5%
6 $176,452 3.5%
Total wealth to family 3,588,115 2,904,888 7 $178,914 3.6%
Amount to charity 0 6,154,986 8 $181,410 3.6%
9 $183,941 3.7%
Total wealth 3,588,115 $9,059,873
10 $186,507 3.7%
Value added by CRT $5,471,759
11 $189,109 3.8%
* Charitable deduction may be subject to AGI limitations.
Key assumptions: Expected trust term = 15 years; market value of asset = $5,000,000; tax basis of asset = $1,000,000; unrealized capital gain = $4,000,000; charitable deduction =$2,322,896
Total arithmetic return = 7%; and volatility = 11.2%; resulting in a geometric return of 6.4% of which yield = 2.4%; IRS discount rate for charitable deduction = 1.4%;
Effective income tax rate = 49.3%; effective capital gains tax rate = 29.7%; effective tax rates include a federal income tax rate of 39.6%, federal
capital gains tax rate of 20%, Medicare surtax of 3.8%, Minnesota tax rate of 7.9%. Effective tax rates adjusted for deductibility and the Pease limitation where applicable.
Tax rates quoted are those used in a majority of years. Taxes on trust income are not subject to Pease adjustments.
Assumptions may not reflect current market conditions. Actual results may be expected to vary from assumptions, which are made for discussion purposes only and may note be relied
on for tax return purposes.
The expected arithmetic return is simply the average of all returns, whereas the geometric return represents an estimate of how volatility impacts the arithmetic return;
Analysis assumes that total deductions excluding charitable gift from this CRT are greater than 3% of total AGI in year 1
CRT
After-Tax Annuity Payments
12 $191,748 3.8%
13 $194,423 3.9%
14 $197,135 3.9%
15 $199,886 4.0%
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CONFIDENTIAL
Note: This presentation is for educational purposes only. This is not for distribution outside of this seminar.
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