Posted by: admin, in Asset Protection
In a prior Small Talk, I explained a way to give assets to a special kind of Tax Free Trust that gave the donor income for the remainder of his and his heirs’ lives, then reverted to a charity. But, for some who are facing big estate tax problems, and who don’t need the money, a different kind of Trust is available. Where the prior Trust was called a Remainder Trust, this Trust is called a Lead Trust. Here’s how it works:
- You set up an Irrevocable Trust with an approved Charitable Beneficiary such as a church, college, community foundation, or even your own private foundation.
- You donate your assets and they are sold by the Trustee.
- The funds are invested at a specified rate of return, and all excess becomes available to the charitable beneficiary for a specified period of years.
- At the end of this period, all the initial grant is returned to your heirs in addition to the earnings which have been compounding over the years. With this kind of Trust, you need not worry about replacing the donated assets because they, or cash plus earnings will revert to your heirs tax free.
- There’s a catch, plus a benefit to all this, so read on:
- First, when you name your non-spousal heirs as eventual receivers of the funds in the Trust,
- That’s the bad news.
- The good news is that the value of the gift is discounted over the existence of the Trust. If the Trust were to last for 20 years, the value of the gift would be discounted over that time by a complicated set of calculations which would drastically reduce the value of the gift.
When a famous celebrity died a few years ago leaving more than $200 million to her kids, in her will she set up both of the foregoing types of Trusts. She named her children as Trustees of the Lead Trust into which she placed many millions of dollars. It lasted for 24 years before reverting to them.
She also named them as Trustees of the Remainder Trust which paid them about $10 million per year for about 10 years, when the balance reverted to charity.
- The catch was that both of the lead and remainder charities were a private family foundation run by her kids.
- The net result was that he estate tax was only about 8% of the wealth passed on.
- This isn’t for everybody, but it certainly gives an example of how learning something about the tax code can be beneficial for just about everybody.
