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Friday, May 3, 2024
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Case Studies |
Planning for the Wayward Child
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Case:
Roland Jenkins is 76 years old. He is retired from the military and lost his wife five years ago in a tragic auto accident. Roland has one son, Jonathan, age 42, who has had serious drug problems, has not been able to hold down a job for years and has had some run-ins with the police. Jonathan's wife divorced him three years ago primarily because of his problems with drugs. Thankfully, they never had any children. Recently, Jonathan has begun to turn his life around having enrolled in a drug rehabilitation program which has produced positive results. He now has a part-time job and it looks as though he finally may be "turning the corner."
In spite of all his son's problems, Roland has been giving Jonathan $10,000 each year for several years hoping he would use the funds to turn his life around. Roland was happy to hear that last year Jonathan invested the funds entirely in the stock market and actually did quite well. As a father, he was pleased to know that Jonathan was finally using the money wisely. Also, because of Roland's continued love and concern for his son, they were beginning to establish a true father-son relationship with one another.
Roland has an estate valued at $1 million which consists primarily of liquid investments - stocks and bonds, his home valued at $200,000 and a small IRA with a value of about $150,000. Because of Jonathan's problems, Roland has been very leery of leaving his estate or even a portion of the estate outright to his son. However, he does want to make sure that his son has access to an income stream for a period of time. Also, Roland is very interested in leaving a good portion of his estate to charity. He is very grateful to the charity which runs the drug rehab clinic assisting his son to overcome his many problems. He would like to express his appreciation for their excellent work and for the seemingly endless hours they have spent listening to and caring for Jonathan.
Question:
Roland recently visited his doctor mainly because he felt that he was beginning to have difficulty with his memory. He received the bad news that he may be in the early stages of Alzheimer's but they needed to run additional tests. Immediately after seeing the doctor he decided to make an appointment with his attorney to make sure that all of his affairs were in order. A number of years ago he funded a revocable living trust with his estate assets. The trust would make provision for his medical care in the event he did have this dreaded disease. However, as it stands now, the trust would distribute his entire estate to Jonathan upon his passing. With this type of plan in place, Roland definitely wanted to make some changes. But what is the best course of action? How should the estate plan be written to provide for Jonathan and for the rehab center? Also, Roland is completely adverse to paying estate taxes. Whatever plan is designed, he wants to make sure that Uncle Sam is not one of the beneficiaries.
Solution:
In talking with his attorney, Roland was presented with a number of options available to structure his estate plan. The option that intrigued him the most was to amend his revocable trust to pour 50% of the trust assets into a testamentary charitable remainder trust. Therefore, the testamentary trust will be funded with $500,000 which would pay income to Jonathan for a term of 20 years. Roland had considered a lifetime trust for Jonathan but thought that 20 years was more than adequate to provide him with solid financial footing, assuming that he takes the initiative to invest a portion of his distributions. Based upon a 5% distribution percentage and an 8% total trust return, Jonathan's projected income over that 20-year period would be over $670,000. Charity would be projected to receive over $870,000 at the expiration of the trust term.
The second aspect of Roland's plan will be to retain $350,000 inside the revocable trust upon his passing which could be accessed by Jonathan over his lifetime. Strict standards would be written into the trust which would allow accessibility to the income and principal up to a limited annual amount only if Jonathan remained drug-free and was gainfully employed. In fact, to provide further incentive for Jonathan, the attorney suggested that the revocable trust distributions match his W-2 income each year. The final piece of Roland's estate plan would be an outright bequest of $150,000 to charity upon his passing. The attorney suggested that Roland change the beneficiary of his IRA to charity. The IRA would be the best asset to use for this purpose because of the IRD (income in respect of a decedent) implications.
Roland likes this plan because Jonathan receives the estate over a very long period of time. He has incentive to stay drug-free and gainfully employed throughout his lifetime. Charity receives a very nice distribution from the estate and no estate taxes will be paid to Uncle Sam because of the charitable estate tax deductions generated by the unitrust and the bequest.
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