Running Head: ESTATE PLANNING 1
TAX665:Milestone Three: Life Insurance, Annuity and Charitable Giving Strategies
SNHU
ESTATE PLANNING 2
Charitable giving by the client will have a direct implication on his income gift as well
as estate tax outcome. A charity donation can help him to reduce his tax obligation. The IRS
allows the deduction of charitable contributions from tax computation (Internal Revenue
Service). Before making the decision, he must consider options relating to charitable remainder
trusts. The IRS has defined charitable remainder trusts as trusts that allow individuals to donate
assets and draw annual income for a specified time period or for life (Internal Revenue Service).
Evaluation of life insurance products, annuities, and charitable giving f
Establishing a Charitable Remainder Annuity Trust is an ideal option for the client and
his beneficiary. It can give rise to several advantages, such as the client can transfer his assets
and real estate to the trust, and the trustee can sell the same at market value (Rojeck, 2019). So,
no implications relating to capital gain taxes will arise. Furthermore, it can also be reinvested in
other places that will help in generating income. He can purchase a life insurance policy to
replace the assets that have been contributed to the trust. The client has to create an irrevocable
insurance trust so that the policy can be transferred to it, and it will not be considered a part of
the gross estate (Parrish, 2019). The client can make a donation below $ 14,000 and name his
children as beneficiaries so that they will be able to get the tax-free insurance proceeds. f
Ethical compliance strategy
Based on the client’s comments relating to the valuation discount on the family limited
partnership, an ethical compliance strategy has been developed. As he showed interest in the
valuation discount approach, it is advisable for him to get in touch with an estate lawyer. The
professional will play a cardinal role in preparing an appraisal report relating to the family
partnership assets. He will follow authoritative guidance and appropriate standards while
providing personal financial planning services to the client (AICPA). In addition to this, the
client must also expand his knowledge of valuation discounts by familiarizing himself with the
ESTATE PLANNING 3
regulations that have been introduced by the IRS. By having a thorough understanding of the
regulatory requirements, he can ensure the tax value is ethically managed.
Additional ethical compliance strategy
An additional ethical compliance strategy has been devised to address issues relating to
the client’s failure to make the timely payment of estate tax and the interest and penalty aspects.
According to Section 6901 of the IRS, personal liability for the payment relating to real estate
income or trust may arise as a result of failure to pay tax (Internal Revenue Service). If the client
fails to pay tax and necessary penalties relating to it, interest will be calculated on the aggregate
amount. In order to avoid the payment of penalties and extra interest, it is advisable for him to
pay tax on his estate in a timely manner. Such an ethical and responsible approach can ensure all
the tax-related obligations are met by the client.
Personal income tax consequences and Value
In the case of the client, it has been suggested that he must set up a Charitable Remainder
Annuity Trust for a decade. According to IRS, in the majority of cases, charitable cash
contribution taxpayers are eligible to deduct, usually 60 % on Schedule A, of their adjusted
gross income (Internal Revenue Service). The proposed strategy could have a direct impact on
the tax-related aspects, and the same is computed in the below table:
Age of the client
65
FMV of real estate (charitable
contribution)
$ 1200000
Cost Basis
$ 1200000
Date of gift
02-06-2023
Received payment
per annum
basis
ESTATE PLANNING 4
IRS Rate of Discount
1.80 %
Annual payout
$ 66000
Ordinary Income
$ 21761.25
Income free of tax
$ 47538.75
Charitable deduction
$ 365546.12
30.46 %
Rate of payment
5.50 %
The value available with the client after
the creation of the IDGT in life-term
estate and gift exclusion
$
2200000
$
1500000
$ 700000
The personal income tax consequences
and Value over the next 24 months based
on the overall proposed tax strategy
Tax rate = 12 % for ordinary income of
individuals ranging between $ 11001 to $
44725
Year
Ordinary
income
Rate 12
%
2023
$ 21761.25
$ 2611.35
2024
$ 21761.25
$ 2611.35
ESTATE PLANNING 5
On the basis of the client’s annual pay-out from the Charitable Remainder Annuity Trust
(CRAT), which is $ 66000 and the tax-free portion of $ 47538.75, it is viable for him to make a
charitable contribution. He will have to pay a minimum tax amount on his ordinary income. In
the next 24 months, he will only have to pay the tax amount of $ 5222.7 (at 12 %). As a
considerable portion of the money is tax-free, the client will be able to purchase the life
insurance relating to the wealth replacement trust.
Reference
Charitable contribution deductions (no date) Internal Revenue Service. Available at:
https://www.irs.gov/charities-non-profits/charitable-organizations/charitable-
contribution-deductions (Accessed: 02 June 2023).
Charitable remainder trusts (no date) Internal Revenue Service. Available at:
https://www.irs.gov/charities-non-profits/charitable-remainder-
trusts#:~:text=Charitable%20remainder%20trusts%20are%20irrevocable,income%20
and%20distributions%20to%20beneficiaries (Accessed: 02 June 2023).
Parrish, S. (2019). Removing the Irrevocable Life Insurance Trust as the Default in Estate
Planning. Journal of Financial Service Professionals, 73(2).
Professional responsibilities (no date) AICPA. Available at:
https://us.aicpa.org/interestareas/personalfinancialplanning/resources/practicecenter/pr
ofessionalresponsibilities#:~:text=Additionally%2C%20all%20AICPA%20members
%20are,client%20confidentiality%2C%20disclose%20to%20the (Accessed: 02 June
2023).
Rojeck, R. P. (2019). Charitable Planning. Wealth: The Ultra-High Net Worth Guide to
Growing and Protecting Assets, 25-36.
ESTATE PLANNING 6
Transferee liability cases: Internal Revenue Service (no date) 4.11.52 Transferee Liability
Cases | Internal Revenue Service. Available at: https://www.irs.gov/irm/part4/irm_04-
011-052 (Accessed: 02 June 2023).
