|
Monday, May 6, 2024
 |
Case Studies |
The Lead Trust - An Estate Planning Tool for a Down Market
|
Case:
Howard and Elizabeth Young, both in their late 50s, have been married for 25 years and have four children. Howard has been actively trading in the markets for many years and for the past year and a half has been trading online. He has a diversified and well-balanced portfolio that has done well, but over the last few months the market has turned downward for his particular investments. The portfolio was worth over $1.2 million earlier this year but due to a market downturn, is now valued at $800,000. Howard feels that his portfolio is very solid, as the stock holdings include many blue chip companies. He is very confident the values will recover, so he has no inclination to sell any of the holdings.
Howard and Elizabeth have an estate valued at $5.5 million and recently met with their attorney to discuss the planning of their estate. In the discussion, the issue was raised of how to transfer the stock portfolio to the children. They told their attorney that they really don't need the income from the portfolio and don't feel that they would ever need the stock for future needs, such as retirement. Howard and Elizabeth both have upper-level management jobs and will retire with excellent retirement benefits.
They have been philanthropists over most of their married lives and have attempted to teach their children the importance of "giving something back." They created a donor advised fund (DAF) at their local community foundation, that gives their children the opportunity to direct funds to various charities. Each year, Howard and Elizabeth have a family meeting with their children and they all decide together which charities will receive funds from the DAF. This has been a very beneficial exercise for the children, as they have had an opportunity to participate firsthand in philanthropy.
Question:
Howard and Elizabeth would like to continue to add funds to the DAF, but they also would like to couple their philanthropy with their estate planning objectives. One of those objectives is to transfer the stock portfolio to their children in the most tax-efficient manner. Is there an estate planning method whereby both of these objectives can be realized?
Solution:
Howard and Elizabeth decided to pose this question to their attorney. After pondering this question, he stated that there was a tool that could accomplish both objectives very well - a non-grantor, or family, lead trust. The portfolio, now valued at $800,000, would be used to fund a charitable lead annuity trust lasting for a chosen term of years. The lead trust would make a distribution to charity (in this case, the DAF) on an annual basis and then, at the end of the term, the trust would terminate and the assets would be distributed to the children. The value in doing this is that the lead trust would not only provide additional funds for the DAF, but would also produce significant gift and estate tax savings. After hearing this, Howard was delighted, but said, "Let's see some numbers."
The attorney gave the following example: Assume the $800,000 is transferred to a lead trust that will pay 8%, or $64,000, to the DAF for a period of 15 years. This will result in total income payments to the DAF over that 15-year period of $960,000. Because the payments will be made to charity for 15 years, Howard and Elizabeth will receive a charitable gift tax deduction of $568,500 and, therefore, they will be required to report a taxable gift of only $231,500. Thus, they will use a small portion of their lifetime exemptions to make this transfer to the lead trust. If the assets of the lead trust have [both earnings and growth] an overall annual return of 10% during the 15-year term, over $1.3 million will be distributed to the children after 15 years. If the trust makes 12%, almost $2 million will be distributed to the children and, assuming an overall annual return of 15%, over $3.3 million will go to the children. The nice benefit is that the projected growth in the trust will pass to the children free of gift and estate taxes.
Howard and Elizabeth are very pleased with these results, as they see that this technique is invaluable in fulfilling their philanthropic and estate planning objectives. They are able to pass substantial dollars to the DAF and provide their children with a very nice inheritance. If the portfolio does recover and perform well over the 15-year term of the trust, the inheritance has the potential to increase dramatically.
|
|
|
|
