Remainder Trust and Lead Trust
A very creative and powerful planning strategy is to combine a charitable remainder trust with a charitable lead trust. These tandem trusts can be funded through a will or living trust when the individual passes away. The testamentary unitrust may be funded with an IRA, pension plan, stock options, commercial annuity or other IRD asset. Normally, the lead trust will be funded with stocks or real property.
The unitrust provides income for the selected term of years to family and the lead trust then provides a deferred distribution of principal. The plan is very nicely balanced and has the advantage of diversifying the inheritance. In most families, some of the children or nephews and nieces are perhaps not as skilled at financial management as others. By diversifying the inheritance, all beneficiaries have greater opportunity to learn good investment management skills over a period of time.
Example 3.11.6A Tandem Trust
Mary Wilson has an estate of $12 million. Approximately $4.5 million is in an IRA and the balance is in stocks and real estate. She is a surviving spouse with four children.
Mary would like to diversify the inheritance. She would like to pass some principal when she passes away, income for a period of time and then a distribution of deferred principal. In addition, she would like to minimize the taxation for the estate. If possible, she would like to save the income tax on the IRA and avoid any estate taxation on the entire estate.
Her advisor suggests a tandem trust. When she passes away, the IRA will pass to a 6% unitrust for a term of ten years. This trust will not pay the ordinary income tax on the IRA and will also produce a substantial charitable deduction of $2,469,326. Over the ten years, the unitrust will pay approximately $2.7 million in income to family members.
Approximately $7.5 million of the estate is transferred into a family limited partnership. When she passes away, the limited partnership units will be distributed to a charitable lead trust for a term of ten years. The lead trust will pay 6% on the underlying assets, or 8.57% on the assets after a 30% FLP discount. The lead trust payout over ten years will be $3,150,000 to charity. At the end of the ten years, the lead trust value of $5,250,000 will be distributed to children. However, the underlying assets at that point are now valued at $7,500,000.
This plan provides the children with a substantial inheritance when Mary passes away. They receive $649,639 plus a distribution from their father's bypass trust at that time. During the ten-year term they receive over $2.7 million in income. At the expiration of the ten years, the assets from the lead trust with value of $7.5 million will be distributed to the children. Each of the four children will receive a total inheritance in excess of approximately $2.5 million.
Mary's advisor shows Mary how the plan can reduce estate tax to zero, save the income tax on the entire IRA, move approximately $2.5 million per child through an inheritance and provide a very substantial distribution to her favorite charities.
