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Trust Provides Donors Income, Tax Benefits for Generosity

ESTATE PLANNING: Protecting your home from the IRS. Second of three parts. Next: The Family Limited Partnership.

May 22, 1994|BETTY LUKAS | SPECIAL TO THE TIMES; Lukas is a Los Angeles free-lance writer

Longtime Westwood residents Alan and Elaine Armer have accumulated a lot of real estate during their 44-year marriage, but, aside from a living trust created in 1979, they hadn't given too much thought to estate planning.

The energetic couple have always been otherwise occupied.

Alan, now 71, spent part of his working life as a television producer. He produced the first three years of "The Fugitive" (1963-1965) before moving on to other TV assignments. Then, after leaving the industry 14 years ago, he began teaching screenwriting and directing at Cal State Northridge, and he's still there.

Meanwhile, Elaine, 63, was busy modeling, raising their four children and, during the '70s, decorating houses the couple had purchased as income property.

Several months ago, however, the Armers focused their attention on estate planning after a relative urged them to do something to minimize future taxes on their estate, which amounts to $4.75 million.

So, with the guidance of an estate planning attorney, the Armers have created a charitable remainder trust (CRT), a device that allows owners of mortgage-free properties to give the property to their favorite charity and to receive an assortment of tax advantages and a lifetime income in return.

Simply stated, a CRT is a device by which a person transfers property to an irrevocable trust and retains lifetime income from the sale of that property. At death, what remains in the trust goes to charity.

What the Armers did with the help of their attorney was to create a CRT that contains their $2.5 million Malibu beach house. When the trust sells the property--it is now on the market--and invests the proceeds, the Armers will receive income during their lifetime. The designated charities will receive what remains in the trust when the last remaining spouse dies.

What makes a CRT so advantageous?

--It removes a piece of highly appreciated property from your estate.

--It allows you to avoid capital gains taxes when the property is sold.

--It allows you handsome income-tax deductions because you've given the property to charity.

--It provides you with lifetime income, which is taxable unless it comes from tax-exempt bonds.

--And, if you become disenchanted with the charity you originally named as beneficiary, it allows you pick another one.

How is all of this achieved? Because the CRT is irrevocable, property put into the trust is out of your estate because it's out of your hands forever. Once created, the trust is administered by a trustee, which could be you or a trust company or the trust department of a bank.

Because the trust is a tax-exempt entity, no capital-gains tax is paid when it sells the property. This allows 100% of the sale proceeds to be utilized to generate income.

Because the IRS looks favorably on charitable donations, it grants generous income-tax deductions to those who make them.

Because one of the conditions of the trust contains an income component for the donor, you receive an annual income for a specified period of time--usually as long as you live.

All of these elements suited the Armers' estate planning goals: They wanted to generate additional income for their retirement, they wanted to avoid capital gains, earn income tax advantages and, perhaps even more important, they wanted to provide financial support for two favorite charities.

There are only two prerequisites to qualify: You must own some highly appreciated real estate and--perhaps even more important in your final decision--you must be willing to give it away forever to some favorite charity. If you're giving away your home, a third requirement is that you must be willing to move when the home is transferred to the trust.

The Armers, who have strong ties to Cal State Northridge's Radio, Film and Television Department and to Jewish Big Brothers of Los Angeles, have named both as recipients of the trust proceeds when they die.

Cal State Northridge and Big Brothers are, in legal terminology, "remainder beneficiaries," which means they will share what remains in the trust after the Armers die. The Armers are "income beneficiaries," meaning they earn income from the trust while they are alive.

Like the qualified personal residence trust (QPRT), your age and the duration (or term) of the trust are important factors to consider in deciding whether this is the appropriate vehicle for you.

The older you are, the larger the tax deduction. The reason is obvious: The older you are, the sooner the charity will get what remains in the trust.

IRS tables are used to calculate the income you will receive based on the value of the trust, but you must specify a minimum of 5% as an annual return. The Armers have selected an 8% return. Based on the expected value of their CRT ($2.5 million), their estimated annual income will be $200,000.

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