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Monday, May 6, 2024
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Case Studies |
The Tandem Trust Estate Plan
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Case:
Marsha Johnson, age 75, has been a dedicated servant of charity over the years. Her spouse passed away about five years ago and, at that time, their combined estate size was over $20 million. Over the past five years, she has been very charitable having realized that she does not need this kind of wealth for her own personal needs. Therefore, she has given away over $10 million to various charitable causes and still has an estate valued right at $10 million, consisting primarily of stocks and bonds. Her five children are doing well financially, but she feels a sense of maternal obligation to use the rest of her estate to benefit them. However, she has been told by her estate planning attorneys that should she transfer the $10 million directly to them at her passing, the estate taxes will be over $4 million! Marsha has explained to her attorneys that she doesn't mind if some estate taxes have to be paid, but $4 million plus is a big number! Along with her children, she also is considering benefiting some additional charities at her death.
Question:
Are there some estate planning tools which can be utilized which will reduce the estate tax bite, provide for her family and also benefit charity?
Solution:
In meeting with her attorneys and after discussing her objectives, Marsha decides to use a concept termed "tandem trust" estate planning, i.e., a charitable remainder trust (CRT) and a charitable lead trust (CLT) created on a testamentary basis as the centerpiece of the overall estate design. When Marsha passes away, the estate will be divided between a CRT and CLT. The idea is to provide income streams to the family and charity and then lump sums to each, respectively, when the terms of the trusts expire. Marsha's estate plan will be written so that $4 million is transferred at death to a 10 % charitable lead annuity trust for a period of fifteen years and another $4 million is transferred to a 6.25% charitable remainder unitrust with income to the family for the same 15 years. Based upon this plan, the estate tax burden drops to only about $2 million.
The results of this plan are as follows, based upon actual dollars received and present values:
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Total |
Present Value (Discounted at 5%) |
| Total after-tax income from CRT to family during the fifteen year period
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$3,538,018 |
$2,453,806 |
| Lump sum payment to family from CLT at the end of the fifteen year period |
$4,000,000 |
$1,924,068 |
| TOTAL VALUE OF INHERITANCE TO HEIRS |
$7,538,018 |
$4,377,874 |
Estate taxes are reduced from $4 million plus to $2 million. Charitable organizations, on the other hand, receive almost $12.7 million from the CLT and CRT based on an investment yield in the trusts of 10%. (The CLT will pay $400,000 to charity for a fifteen year period for a total of $6,000,000, and the lump sum distributed to charity at the end of the fifteen year period from the CRT is $6,697,200).
The tandem trust plan, as Marsha discovers, is a nice tool for benefiting her family and charity. The family's inheritance is decreased minimally because of the substantial reduction in estate taxes. At the same time, the results are quite impressive for charity, as well.
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