A Candidate’s Tax Return Shows Estate Planning

There has been considerable back and forth over the release of 2012 Republican Presidential candidate Mitt Romney’s income tax return. He released his 2010 federal income tax return recently. It’s been widely publicized that the return reports over $21 million of income and that he paid tax at an effective rate of less than 14%.

The return reveals the use of trusts. The return references a “blind trust.” A blind trust is used to avoid the appearance of an improper bias. Theoretically, the Romney’s would not have knowledge of the assets in the trust and, therefore, would have no reason to implement or advocate political policies to favor those investments. With a blind trust, the trustee does not divulge the nature of the investments to the grantor.

The tax return also hints at the implementation of estate planning strategies. In particular, the return shows over $1.5 million of dividends from the Ann & Mitt Romney 1995 Family Trust. Of course, due to the nature of trusts, we do not know the terms of that trust. But, we could speculate that this was an irrevocable trust set up as a grantor trust. With a grantor trust, the income is taxable to the grantor even though the income may remain in the trust or gets distributed to others. This is a common way to reduce transfer taxation because the income tax paid on the trust’s income is not deemed to be an additional gift by the grantor.

The tax return also shows the existence of the W. Mitt Romney 1996 CRUT. A “CRUT” is a Charitable Remainder UniTrust. With a CRUT, the trust pays a fixed percentage of its assets to the non-charitable beneficiary each year during the term of the trust. At the end of the trust term, the remainder of the trust goes to the charity. The CRUT itself is a tax exempt entity. However, distributions from the CRUT to the non-charitable beneficiary carry out the income tax characteristics those dollars would have had.

Let’s look at a simple hypothetical. Mitt owns $1 million of XYZ Corporation, which he acquired for $100,000. If he sold the stock, he would recognize a gain of $900,000 and pay tax at 15% ($135,000) on that gain. If he contributes the stock to the CRUT, he will get a charitable income tax deduction based on the full fair market value of the stock (including the $135,000), less the value of the income interest he has retained. When he receives distributions from the trust, they will be “flavored” by any income the CRUT has received, first ordinary income, then capital gain, etc. Thus, the CRUT can be a great way to defer the income tax consequences of a sale of an asset that has gain.

While we cannot know Mitt Romney’s exact estate plan from this income tax return, the peek reveals the likelihood of some reliable estate planning tax strategies.

Stephen C. Hartnett J.D., LL.M.
Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (800) 846-1555
www.aaepa.com

• Author
• Recent Posts

Steve Hartnett

Director of Education, American Academy of Estate Planning Attorneys

Latest posts by Steve Hartnett (see all)

• Donor Advised Funds: Too Good to Be True? - August 10, 2021
• Conservation Easements Can Be a Good Solution - August 3, 2021
• Dangers of Do-It-Yourself Estate Planning - July 27, 2021