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Sunday, May 5, 2024
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Case Studies |
Marketing Ideas During Soft Markets and Dropping Interest Rates, Part 2 - The Treasury-Inspired CLAT
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Case:
Jeanne Henry, 77, is a very concerned American. Having grown up during the Great Depression, Jeanne developed certain attitudes towards money and savings. As a result, she saved consistently and conservatively during her entire life. For instance, Jeanne would only invest in bonds and blue chip stocks. However, she would never invest based upon a "great tip, hot stock or a real mover." Jeanne wanted strong, product-based companies. As a result of her steadfast belief in savings and smart investing, Jeanne and her late husband Jeff accumulated a $7 million estate.
However, over the past two years, Jeanne's investments have had some ups and downs. With the uncertainty of the economy, some of her stocks have fallen in value. As disappointing as it is, Jeanne believes in her investments and knows, when the market turns around, many of her stocks will rebound very nicely. As a result, she has chosen to leave her diversified portfolio of blue chip stocks predominately intact.
Jeanne would like to revisit her estate plan especially considering the current changes in her estate, the economy and interest rates. She would like to pass on some of her investments and values to her children and grandchildren, and, if possible, avoid paying any gift and estate taxes as well.
Question:
How can Jeanne transfer $1 million to her family without the payment of any gift taxes and make use of her gift exemption? Can Jeanne potentially leverage the down market stocks to pass additional value to her family without having to pay tax on her gift tax return?
Solution:
Jeanne should consider using a Charitable Lead Annuity Trust (CLAT). Jeanne would transfer $1 million of her blue chips stocks to the CLAT. The CLAT would be drafted to pay a 6% annuity to charity ($1,000,000 x 6% = $60,000) for 12 years.
Because interest rates have fallen sharply, the applicable federal rate used to compute the charitable deduction is a mere 3.2%, which is one of the lowest rates ever issued. Consequently, Jeanne's 12 year CLAT will produce a charitable gift tax deduction of approximately $590,000. Thus, the taxable gift is only $410,000 ($1,000,000 - $590,000). This transfer requires Jeanne to file a gift tax return. However, because she will apply her gift tax exemption to the transfer, no gift tax will be due. Jeanne's available exemption will decrease to $590,000 as a result of the transfer.
Jeanne is very pleased with this solution, but realizes the real opportunity lay below the surface. Jeanne believes that the current stock market is artificially undervalued due to investor worries and fears. She foresees that within 1-3 years blue chip stocks will surge back. Therefore, if her forecast materializes, the CLAT stockholdings could potentially double in value to $2 million! Thus, by taking advantage of a down market Jeanne would pass an additional $1 million to her family with no added gift tax. While recognizing the risk, Jeanne is extremely excited about this plan, since these investment strategies are based on a long-held belief and strategy.
Lastly, $720,000 will be distributed to charity as a result of Jeanne's CLAT. She is amazed with this additional benefit and decides that her CLAT will benefit her three favorite charities equally. In the end, Jeanne is completely happy with his plan. She turned falling stock markets and interest rates into a golden opportunity to help family and charity.
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