Family Wealth Retention and Family Asset Protection
What does it do?
This provides a current tax deduction for the donor for the present value of the remaining balance of the trust. The donor receives a current annual income. The heirs receive nothing at the passing on of the donor, as the reamining balance will go to the charity.
Charitable Remainder Trusts are very popular
What is it?
In this arrangement, the charity receives the amount remaining in the trust fund after the passing on of the donor. Meanwhile, during the lifetime of the donor, the donor draws income from the trust and infact is allowed to invade the corpus, if the trust instrument is written correctly. The donor is prohibited from drawing any amount that will not leave at least 10% of the original amount upon the passing on of the donor.
What does it do?
Well, if we're confident that the assets we're going to put in the fund are going to perform at 12% or 14%, then we can design this trust so that, actuarially speaking, the remainder interest will have very little value at the end of the set period. We might design this as a 13-year, 13% annuity. Now when you evaluate a 13-year, 13% annuity with a rate of 7.2% as the target (because that's what the IRS gives us) you'll find that 98% of the value we put in the trust gets allocated to the charity, while 2% is allocated to the remainder. If the client puts a million bucks in this thing, that means the client is going to get a $980,000 income tax deduction, and $20,000 will go to the kids as a taxable gift. But now, if we assume that we've got a really sharp money manager who consistently gets us 12% or 14% or, hell, 20%, there might be $2 million in the pot at the end of the term. It might have actually grown way beyond the original million. So guess what? We just got $2 million to our children, and it only cost us a $20,000 gift back in year one.
What is it?
In this arrangement, the charity receives a lead interest (annual income, during the life of the donor) for either a period of years or for the lifetime of a person. Usually, we do it for a period of years; we define how long the charity is going to get its interest. It might be a 10- 12- or 14-year annuity, and again we can set the percentage of interest that goes to the charity. At the end of this period, the remainder can revert back to the client, or it can go to the children or into a dynasty trust for the children.
Yes, and my clients actually like to fund their Charitable Lead Trusts with Family Limited Partnerships. It's a fabulous arrangement. Let's say we've got a $10 million strip mall that produces net cash flow each year of $600,000. We put that mall into a Family Partnership. We then take a 50%, limited partner's interest and contribute it to a Charitable Lead Trust, say a 14-year, 12% annuity trust. Question one: what is the value that we put in the lead trust? It's not $5 million; it's not 50% of $10 million. It's probably half of that, based on the way that most appraisals are coming out these days. So in effect we have a $2.5 million gift to this lead trust. For the next 14, years this lead trust has to pay a 12% annuity, which works out to $300,000 a year to the charity. If this partnership has a $600,000 annual net cash flow, there's going to be no problem meeting that $300,000 annual obligation. When the smoke clears after 14 years, we still have $300,000 that wasn't committed, plus the assets have appreciated, and that $10 million portfolio is worth 15, 16, maybe 20 million dollars. Now, the 50% interest in the FLP gets shot off to the kids in some way. Guess what? It has considerable value at that point. We might have just got a 6 or 7 million-dollar chunk of our assets to our children for almost no gift tax cost. That's the nuts and bolts of a powerful strategy that helps wealthy people to retain their wealth, but remember, it also does a big favor to a charity as well.
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