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Wednesday September 17, 2014

Case of the Week

Lead to Remainder Double Charitable Trust


George Green was a man of humble beginnings. He was born in Bulgaria and lived with his parents on their farm. But George was a diligent student and was determined to become a successful business owner. After high school he obtained permission to come to America to go to college. George applied to several colleges and was accepted as a work-study student at a state college. He lived in the dorm and worked nights in the cafeteria. On weekends, he moonlighted as a waiter at a five-star restaurant.

George was both resourceful and determined to succeed. He started by buying a run-down home in a modest neighborhood, and spent nights and weekends fixing, painting and repairing. After everything was finished he sold it at a profit and hired two assistants. Within two years, George was regularly buying and renovating buildings. He also started to build homes and commercial buildings. Over the years, he continued to build and gradually acquired several valuable commercial buildings.

Early in his career, George met and married Linda. They raised two children, Susan and Clifton.

Linda was a strong supporter of a local charity. George is now on the board and would like to help with a major project. The project will require a gift of $100,000 per year for seven years and will be named the Linda Green Center. George also wants to pass an inheritance on to their children Susan and Clifton.

As George and Linda discussed the inheritance with their attorney Sharon Erickson, he noted, “We started with nothing. I want to give Susan and Clifton a good income, but no principal. And I do not want to pay any estate tax. I support my government, but over the years I have supported my government!”


One of their properties is a $2 million commercial building. It is fully leased with fixed payment leases. George wonders how to use this building to achieve his objectives. How can he fund the Linda Green Center and provide lifetime income for the children with no estate tax?


Sharon pondered the problem and responded, “George, I think that I have a solution. Let’s consider a double charitable trust. We can transfer the building into a charitable lead trust and pay $100,000 to favorite charity for seven years. After that time, the building can be given to a two life remainder trust for Susan and Clifton.”

George responded, “Seems like a good idea. But tell me more about how it will work. How much is paid to favorite charity? How much will Susan and Clifton receive?”

Sharon continued, “Look at this flow chart. Your building is transferred into the seven year lead trust. The 5% net income from the building is paid to favorite charity for seven years. That equals the $700,000 gift for the Linda Green Center. When you fund the trust there is a gift tax charitable deduction, and with your gift exemptions you will pay no gift tax. After seven years, the building has increased in value to $3.1 million. It is then given to the 6% charitable unitrust for the lives of Susan and Clifton. In the unitrust, the building can be sold tax-free and the proceeds reinvested. With $3 million after-sale costs in the unitrust, the 6% payout is about $180,000, so each child will receive $90,000 per year for life. And if the unitrust increases in value, their income will also increase. Over their lives, Susan and Clifton each should receive about $2.5 million.”

George and Linda were delighted with Sharon’s plan for the double lead trust-unitrust. He exclaimed, “Linda and I love this plan! It helps to build the Linda Green center and still provides a fine lifetime inheritance for our children.”

Published September 12, 2014
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