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TAX665:Milestone Three: Life Insurance, Annuity and Charitable Giving Strategies
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 g
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. g
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 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
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
FMV of real estate (charitable
$ 1200000
Cost Basis
$ 1200000
Date of gift
Received payment
per annum
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
$ 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
Rate 12
$ 21761.25
$ 2611.35
$ 21761.25
$ 2611.35
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.
Charitable contribution deductions (no date) Internal Revenue Service. Available at:
contribution-deductions (Accessed: 02 June 2023).
Charitable remainder trusts (no date) Internal Revenue Service. Available at:
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:
%20are,client%20confidentiality%2C%20disclose%20to%20the (Accessed: 02 June
Rojeck, R. P. (2019). Charitable Planning. Wealth: The Ultra-High Net Worth Guide to
Growing and Protecting Assets, 25-36.
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).
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