Layered Lead Trust for Children and Grandchildren
A very powerful combination is a family limited partnership with layered lead trusts. Two or three layers may be annuity lead trusts for children and the remaining layer or layers may be lead unitrusts for grandchildren.
Example 3.6.6 Four Layer Lead AT/UT
Susan Carpenter has a $13 million estate. She is a surviving spouse. Her husband passed away and created a bypass trust. The bypass trust plus his life insurance trust will distribute approximately $5 million to their two children when she passes away. In addition, she would like to pass some principal to children over a period of years. However, with a $13 million estate, she believes that it would be desirable to make a transfer of a major portion of the estate to grandchildren.
She asks her advisor whether or not it is possible to transfer $12 million to family with zero estate tax. In addition, she would like approximately $2 million of that amount to go to children and $10 million to be distributed to grandchildren. However, since the grandchildren are now very young, it will be essential to defer the distribution to grandchildren for 20 years.
Susan's advisor recommends a family limited partnership/lead trust for children and grandchildren. He suggests a charitable lead annuity trust in two layers for the children. There will be a 10 year trust and a 15 year trust for the children. He also recommends that a charitable lead unitrust for 20 years be created for the grandchildren. The three-layer trust thus will make distribution of principal to children after 10 and 15 years and then to grandchildren after 20 years.
$12 million of the $13 million in assets are transferred to a family limited partnership. With approximately one-half real estate and one-half securities in the FLP, the experienced appraiser establishes a 30% discount for the lack of marketability and lack of control in the family limited partnership. The $12 million in assets is discounted to $8,400,000.
When Susan passes away, the $1 million is bequeathed to their family foundation and the FLP limited partnership interests are transferred to the three lead trusts. Each year, the general partner makes distribution of sufficient assets to the trustee to pay the annuity to charity. The annuity is 6% of the underlying assets, or 8.57% of the discounted value.
After 10 years and 15 years, approximately $2 million in underlying asset value is distributed to children. After 20 years, approximately $10 million in underlying asset value is distributed to grandchildren.
As a result of the double discount for the FLP and the charitable deduction, the estate tax is reduced to zero. The plan enables Susan to pass her desired $2 million to children, $10 million to grandchildren and to fund the family foundation with nearly $14 million. Her children and grandchildren will be board members of the family foundation and will use these funds to make distributions for many years in the future.
