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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

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