Revisiting the Estate Plan ...30 Years Later
Continued from page 1
4. That simple distribution of all the estate assets equally in lump-sums to the two surviving children translates to $3.4 million ($1.7 million each) arriving in their respective mailboxes on a given day. The timing may not be ideal:
One of the sons is having marital problems. The other heir is 25 and covets an Aston Martin.
A close friend is opening a bar and grill and is looking for a partner.
A college classmate has just entered the invest- ment business and looks forward to growing that nest egg.
Conclusion — Lump-sum distributions do not secure your clients’ heirs. They simply provide an opportuni- ty for large losses and, in many cases, a disincentive to personal and career development.
Our almost-65-year-old baby boomer couple needs to revisit the plan and ask themselves:
What is the current value of our estate?
Whom do we want to include as beneficiaries?
When should they receive it?
In what form should it be given?
Will the federal estate tax be levied?
If so, how can it be reduced?
Will the plan transfer our values as well as our wealth?
Does the plan include our favorite charities?
Will our funds act as a disincentive to our heirs’ career development?
Will the plan cause conflict among our loved ones?
Does the plan include professional investment management?
Testamentary Trusts... Securing the Legacy
Let’s revisit that $3.4 million estate mentioned earlier. Instead of delivering two checks for $1.7 million to your clients’ two children, wouldn’t it offer greater security to make multiple distributions over
time? For example, each heir could receive a modest lump-sum of $100,000 initially, a professionally managed stream of income ($40,000-plus per year) for a term of 20 years and a deferred legacy of over $800,000 at the end of that 20-year term.
Now those “timing issues” mentioned earlier don’t represent such a threat to the heirs’ future security. And, the decedent/grantor of these trusts, with years of money management experience, has been able to select the trustees for these funds.
If you agree that the latter arrangement provides a more secure legacy for your clients’ heirs, let us add one more element...a charitable component.
Testamentary Charitable Trusts... Securing and Expanding the Legacy
1. The Income Component
A 5 percent charitable remainder unitrust with a 20-year term funded by an $800,000 testamentary contribution would provide $40,000 of annual income for each of the heirs in our example. More specifically, assuming average trust earnings of 6.37 percent annu- ally, the income payout from this trust would grow from $40,000 to more than $50,000 over the 20-year term. Projected total income to each heir for the term is $914,000. Additionally, the estate would enjoy an estate tax charitable deduction of more than $290,000, saving potentially $130,000 or more in taxes.
Finally, our decedent would expand his legacy with a charitable remainder of over $1 million passing to the charities named in the remainder trust document.
Talk about expanding the estate...$800,000 in trust has resulted in $914,000 to each heir and $1 million to charity...pretty good multiplication.
2. The Deferred Component
A 5 percent charitable lead annuity trust with a 20-year term funded by an $800,000 testamentary contribution would further secure the heirs. After 20 years of income distributions to selected charities, this trust would provide a lump-sum distribution to the aging heirs (or their children, if they do not survive 20 years). Assuming the same investment performance as above, the beneficiaries would each receive $1,266,000.
Additionally, the estate would enjoy a $570,000 estate tax charitable deduction, saving potentially $250,000 or more in taxes.
Finally, our decedent would expand his legacy by $800,000 in charitable distributions over the 20-year
deferral period. Continued on page 3