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Thursday, May 2, 2024
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Case Studies |
A CLAT in the Line of Fire
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Case:
Robert "Mac" Barr, 45, is a decorated officer in the Marines. Mac has participated in and commanded numerous offensives over his 25-year career, with Desert Storm being the most notable. Not surprisingly, Mac's profession is considered "high risk." In fact, he has been wounded twice and frequently is in the line of enemy fire.
In contrast to his "day job," Mac is a beloved husband and father of two girls. While fearless in battle, Mac worries frequently about how his family would fare if anything should happen to him. His wife is an accomplished business executive, so his concerns are more directed to his two "little girls," ages 19 and 18. He wants to know that if anything should happen to him they would be taken care of.
Despite being a government employee, Mac actually has a $3 million estate, which he inherited from his late father. Of the $3 million estate, Mac owns over $2 million in blue chip stocks and wants $1 million of it to eventually go to his girls. Ideally, Mac would like his girls to get it when they are about 35. However, should he fall in the line of duty, Mac wants them to have access to the money sooner rather than later. He does not want to pay any taxes on the transfer and would consider charitable planning if it would benefit veterans.
Question:
How can Mac accomplish a $1 million tax-free transfer to his girls, taking into the possibility that Mac may be killed in the line of duty? Can Mac also benefit veterans at the same time?
Solution:
Mac can create a non-grantor, or family, charitable lead annuity trust to achieve his goals. The CLAT would be drafted to have an annual payout of 3% (Editor's Note: CLTs, unlike CRTs, may have payouts below 5%), or $30,000 ($1,000,000 x .03). Further, the CLAT would be written to last for the lesser of Mac's life or a term of years (the EZ lead trust option in Crescendo). Specifically, the CLAT would run for 17 years unless Mac died prematurely. In that case, the trust would terminate upon Mac's death.
In this situation, the charitable gift tax deduction for this transfer is $325,761. Therefore, the taxable gift is $674,239 ($1,000,000 - $325,761). Mac can then apply his applicable exemption amount to the gift; thereby owing no gift taxes whatsoever. In addition, assuming an 8% return on the CLAT's assets, the trust will grow to a whopping $2,687,511 over 17 years. Moreover, the growth in the trust will not be subject to any further gift or estate tax.
Mac is amazed with the flexibility of this plan, and finds peace in knowing that his girls will be taken care of in the event of his untimely death. In addition, his lead trust will pay more than $500,000 to charities serving deserving veterans. Happily, Mac will fund the CLAT for his daughters with $1 million of stocks. In the end, Mac will not only serve his country well, but also will serve his daughters and fellow veterans admirably.
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