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Saturday June 23, 2018

Case of the Week

No Marital Deduction Needed


Keith and Karen Crosby, ages 75 and 72, own a parcel of undeveloped real estate that they have held since 1979. They purchased the property for $10,000 and the current fair market value is approximately $800,000. Their goal for this property was to transfer it to their two children upon their passing, but they could use more income now. Since their estate is approximately $2.5 million and each has an estate exemption over $5 million, they are not facing estate taxes.

They have not considered selling the property because of the capital gains tax consequences, so they find themselves "between a rock and a hard place" on how to increase their income. They are both in relatively good health, but Keith did suffer a heart attack seven years ago and Karen recently suffered a minor stroke. They have both recovered nicely and are continuing to experience an active lifestyle which involves a good deal of traveling.

Keith and Karen are active philanthropists and were recently presented an award which honored their years of service and financial support of a local charity. They are interested in leaving a bequest to this favorite charity, but would like to couple this gift with benefits for their children. Also, because they plan to travel more extensively in the future, additional income would be a worthwhile objective in their planning. In discussions with Susan Collins, the Director of Major Gifts at their favorite charity, she explained the concept of funding a lifetime charitable remainder unitrust with the undeveloped real estate. Susan then suggested that they could replace the asset by purchasing insurance through a life insurance trust. By utilizing the "Crummey" powers, the insurance could pass to the children free of gift and estate tax.


Susan did not realize that because of Keith and Karen's health history, they probably would not qualify for life insurance. Therefore, since the replacement insurance idea is not available to Keith and Karen, is there some other method to transfer value to the children and also provide for charity?


In a subsequent meeting with the Crosbys, Susan explained that there may be another way to fulfill their objectives. Susan stated that they may consider funding a unitrust that will last for their lifetimes. After they pass away, the unitrust would continue to distribute income to their children for a period of fifteen years. In order to avoid any gift tax consequences, a testamentary power of revocation will be included in the unitrust document. However, even though there are no gift tax consequences, Keith and Karen will be required to include a portion of the trust corpus in their estates.

For example, assume Keith and Karen create a FLIP life-plus-term unitrust with jointly-held property. When Keith passes away, one-half of the value of the trust as of his date of death is includible in his estate (assuming he passes away first). A charitable estate tax deduction calculated on a one-life-plus-term trust will then be available on Keith's estate tax return. The net amount (one-half of the trust corpus minus the deduction) is subject to potential estate taxation. Subsequently, when Karen passes away, a similar computation is performed on her one-half interest in the trust corpus with the charitable estate deduction calculated on the remaining term of years trust.

Susan also explained the potential impact of estate tax. If the unitrust paid only to Keith and Karen, it would qualify for the marital deduction in the first estate and the charitable deduction in the survivor's estate. But since the trust pays to children, there is no marital deduction. However, since Keith and Karen each have a substantial estate exemption, estate taxes will not be a problem.

Keith and Karen were both pleased with this planning option and decide to use the undeveloped land to fund a unitrust for their lives with an extended term payable to their children for an additional fifteen years. They decide to choose a 5% payout. When the property is sold within the trust, they can expect to receive a distribution of $40,000 the first year with increasing distributions in future years should the trust investments yield more than 5%. They will bypass the capital gains taxes and receive an income tax deduction of over $200,000. When they pass away, the children will receive fifteen years of income from the trust which in total will more than replace the property used to fund the trust initially.

Through the life-plus-term concept, Keith and Karen are able to fulfill all of their objectives - increased income for traveling, bypass of capital gains taxes, provision for the children and a substantial gift for their favorite charity.

Published August 4, 2017
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Previous Articles

The Gas Guzzler's Deduction, Part 3

The Gas Guzzler's Deduction, Part 2

The Gas Guzzler's Deduction, Part 1

Exit Strategies for Real Estate Investors, Part 17 The Double Deferral Solution

Exit Strategies for Real Estate Investors, Part 16


Shelby Harder, 2018
Dr. Irving Auld and Dorothy
Roher Auld Scholarship

"Many students take for granted what a university has to offer. However, I am thankful every single day for the opportunity to attend this prestigious school. At Lawrence, you have the ability to engage in Socratic debates about the world we live in at dinner, play recreational or NCAA sports, and talk one on one with brilliant professors. At Lawrence, you don't just 'learn' a subject, you are immersed in it. You dive into the liberal arts and these professors show you the beauty in it all, and how everything is tied together. I am a Biochemistry major with a soft spot for rocket science, philosophy, and evolution. Lawrence is my dream school, and it would have never been possible without the Dr. Irving Auld and Dorothy Roher Auld Scholarship. I am forever grateful for their generosity."

Juliana E. Olsen-Valdez, 2018
Carroll Family Scholarship

"Lawrence University is a great place for students looking to embrace their multi-interested approach to learning. As a Geology major, I have spent many long hours in laboratories. But, I have also had the opportunity to organize and lead students on outdoor backpacking trips, help build a stronger community for International students, participate in dialogues on campus initiatives, attend dozens of musical events, and study abroad in a field-based geology program, all while taking classes in a variety of academic spheres on campus. Lawrence, as an institution and student body, creates a collective of learners, listeners, and leaders who are continuously evolving their understanding of the world around them. I am fortunate to have the support of the Carroll Family Scholarship, so that I can say I am a part of this exceptional community too!"

Weiqi "Vicky" Liang, 2019
Marian H. Cuff Endowed Scholarship

"Lawrence is a special institution with nice people around the campus. I better myself by trying out different things and using new ways to think critically. Even though I am a Philosophy major, I have successfully taken classes in Anthropology, Biology, Economics, and Government. In addition, I still find many great extracurricular opportunities to explore, such as singing with Viking Chorale, even though I am not a music major. While having the great experience of volunteering at the elderly center last year, I became an elder advocacy coordinator at the Volunteer Community Service Center. At Lawrence, I've learned to handle difficult academic problems while looking forward to exploring possible opportunities. I am very grateful to be awarded the Marian H. Cuff Endowed Scholarship for every year I have been here, and appreciate that the scholarship has provided this wonderful Lawrence experience to me."

Anthony Cardella, 2018
Ansorge Family Scholarship

"I am so excited that I am able to attend Lawrence University. I know that I will make great progress studying piano with Dr. Michael Mizrahi. Since being at Lawrence I've already made a lot of progress and I really love it here. I am so grateful for the Ansorge Family Scholarship that made it possible for me to come to Lawrence because without it, I might not have been able to afford the cost of attending a school that is a great fit for me and a place where I will learn so much and go so far."

Milwaukee-Downer Scholarships and Professorships

Some of the many recipients of Milwaukee-Downer scholarships gather for a photo with Carolyn King Stephens M-D'62 and Marlene Crupi-Widen M-D'55 in January 2014 at the annual scholarship luncheon.

Rosamund Victoria Bille Adler Scholarship
Dr. Charles E. Albright Scholarship
Helen Daniels Bader Scholarship
James G. and Ethel M. Barber Scholarship
Catharine Beecher Endowed Fund for Downer Women
Bessie A. Bell Scholarship
Berk Scholarship
Frederick C. Best Scholarship
Beta Study Club Scholarship
Lynde Bradley Scholarship
Lucia R. Briggs-Alumnae Scholarship
Edith Lange Brooks Scholarship
Anne Barman Caldwell Scholarship
Alice Miller Chester Scholarship
City of Milwaukee Student Funds Scholarship
Milwaukee-Downer Class of 1940 Fund
Milwaukee-Downer Class of 1942 Fund
College Endowment Association Scholarship
Janet Cope Crawford Scholarship
Jessie Mabbott Daniels Scholarship
F. T. Day Scholarship
Rufus Dodge Scholarship
Julia P. Ely and Hannah R. Vedder Memorial Scholarship
General Endowed Scholarship - M-D College
Dr. Alfred W. and Mrs. Ada F. Gray Scholarship
Berenice E. Hess Scholarship Endowment
Lucille Ray Hibbard Scholarship
Belle Austin Jacobs Scholarship
Helen McDermott Jurack and Ronald J. Mason Scholarship
Marjorie S. Logan Scholarship
Nellie Maxwell Scholarship
S. Annabelle & Paul McGuire Scholarship
Memorial Scholarship Fund - Milwaukee-Downer
Milwaukee-Downer Class of 1953 Scholarship
Milwaukee-Downer Class of 1955 Scholarship
Milwaukee-Downer Class of 1956 Scholarship
Milwaukee-Downer Class of 1957 Scholarship
Milwaukee-Downer Class of 1958 and 1959 50th Reunion Scholarship
Milwaukee-Downer Club Scholarship
Milwaukee-Downer/Lawrence College Consolidation 50th Anniversary Scholarship
Francis Evelyn Kelley Morgan Memorial Scholarship
O'Neill-Anderson Family Scholarship Endowment
Elizabeth A. Olson Scholarship
Gilbert Haven Peirce, Sr. and Emma Elizabeth Manor Peirce Milwaukee-Downer Scholarship
Aleida J. Pieters Scholarship
Matilda Siefert Puelicher Scholarship
Elizabeth Ann Richardson Scholarship
William M. Ross Memorial Scholarship
Elizabeth Rossberg Scholarship
Charles Frederic Sammond Scholarship
Mildred L. Schroeder Scholarship
Sivyer Educational Fund for Women
Marion Merrill Smith Scholarship
Dr. Elizabeth A. Steffen Scholarship
W. Mead and Elizabeth McKone Stillman Scholarship
Strzelczyk Family Scholarship
Clare Scherf Sweetman Scholarship
Raymond H. and Jane K. Taylor Scholarship
Jerline E. Walfoort Memorial Scholarship
Barbara E. Wehr Fund
Harmony Weissbach Scholarship
Martha and Frances Wheelock Scholarship
James G. and Ethel M. Barber Professorship of Theatre and Drama
T. A. Chapman Professorship in Music
Alice G. Chapman Professorship in Physics
Alice G. Chapman Librarianship
Milwaukee-Downer College and College Endowment Association Professorship

Angela Small Fry Intia, 2019
Maurine Campbell Scholarship

"Thanks to the Maurine Campbell scholarship, I have been able to attend the amazing school that is Lawrence University. With the help from this scholarship, I have been able to pursue my dream career in chemistry working with the outstanding and extremely helpful faculty here. Even outside of chemistry I take the time for exploration into my interests and want to give back through my work as a resident life advisor, stock room assistant, and student supervisor at Bon Appetit. Everything I have learned here, academically or not has forever molded the person I am today."

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