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Tuesday, May 7, 2024
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Case Studies |
Treat Your Grandchildren (and Charity) Well
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Case:
Ginger Goodman is age 70 and is in poor health. Even though she is not expected to live for more than four years, she is still fully capable of handling her affairs. Ginger's spouse passed away five years ago as a result of a heart attack, and she has three children and five grandchildren. Through the use of a family limited partnership, Ginger has been able to transfer substantial wealth to her children and now would like to benefit her grandchildren with the assets remaining in her $3.1 million estate. Her grandchildren range in ages from 10 to 18 years old and, therefore, she feels that they are still too young to handle a large inheritance. However, she would like to give them a small inheritance when she passes away to help them with a college education and also "get started" in life. She would like to delay any large inheritance for a period of at least 20 years, until the youngest is 30 years of age.
One of the estate planning tools that Ginger and her husband utilized was an irrevocable life insurance trust (ILIT). Ten years ago, the ILIT purchased $500,000 of second-to-die life insurance on behalf of the grandchildren. The ILIT was funded over the past 10 years using the "Crummey" powers and additional premiums are no longer required. Upon Ginger's death, $100,000 will be distributed to each grandchild. This distribution meets her objective for education funding and enables the grandchildren to begin their lives on a solid financial foundation.
In consultations with her attorney, Ginger knew that any significant transfers to her grandchildren will be subject to estate tax as well as generation-skipping transfer tax. In fact, any transfers to her grandchildren in excess of her GST exemption will be subject to generation-skipping tax. Because of savvy estate planning previously done by her attorney utilizing a family limited partnership and her husband's lifetime exemption through a credit shelter trust, she has been able to fully preserve her lifetime exemption.
Question:
Ginger and her husband have been philanthropists all of their lives, and Ginger would like to continue their tradition of giving after she is gone. She is particularly interested in providing the necessary funds to help build a new cardiology wing at the local medical school where her husband was treated when he suffered his heart attack. Ginger would like to make a major contribution in her husband's name, but she is unsure of how much to give and how best to utilize her assets for the medical school as well as her grandchildren. The Director of Development at the medical school stated that if she would donate $4,000,000 to the medical school, they would name the wing after her and her husband. Ginger was very impressed that she could leave such a legacy and decided to meet with her attorney to develop a plan to satisfy her objectives. She asked the attorney: "Is there some estate planning tool that will provide for both my grandchildren's future needs and the necessary funds to build the cardiology wing of the medical school?"
Solution:
The attorney explained to Ginger that there is indeed a very favorable estate planning tool to fulfill her objectives. This is the charitable lead unitrust. The attorney would draft instructions for Ginger's executor to allocate her generation-skipping tax exemption to a charitable lead unitrust. This trust pays 6% to the medical school for a period of 20 years, with the remainder of the trust to the grandchildren. If $2.8 million of Ginger's estate is used to fund the lead trust, a charitable estate tax deduction of $1.9 million would be generated. The remaining portion of her estate would be utilized to pay the estate taxes, if any, and any other associated costs to wrap up the estate.
There are a number of favorable results to this plan. Since $2.8 million is transferred to the lead trust, approximately $900,000 of the generation-skipping transfer tax exemption is allocated, resulting in no generation-skipping tax. Estate taxes are reduced significantly as a result of the charitable estate tax deduction generated by the lead trust. Based upon a trust investment return of 9%, the medical school will receive $4.5 million over the 20-year term of the lead trust, thus fulfilling the charity's requirement to name the cardiology wing after Ginger and her husband. Finally, at the end of the trust term, the trust is projected to be worth over $5 million (once again, based upon an investment return of 9%). Therefore, if Ginger desires, each of her grandchildren will receive approximately $1 million after the expiration of the 20-year trust term.
Ginger is very pleased with the plan proposed by her attorney. Through the charitable lead unitrust, she is able to meet her charitable objectives as well as her objectives for her grandchildren. The medical school and the grandchildren are very appreciative of Ginger's generosity as they both feel that they have been treated very, very well!
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