Charitable Lead Trusts and Family Wealth Preservation
The need for competent estate planning is not limited to the ultra-wealthy, although the consequences of a poorly designed plan can have catastrophic effects in a large estate. Proportionally, it appears that the small business owner, farmer or professional is penalized more harshly because the ultimate impact is so devastating. Additionally, the smaller estates do not usually seek the sophisticated expertise routinely available to larger estates and this lack of proactive planning is the primary reason they seem to shoulder more of the tax burden.
It is important to realize that estate taxes are mostly voluntary. This means that if you choose not to plan, you have then chosen or volunteered to pay unnecessary expenses. Unfortunately, estate taxes have a ripple effect on the family and community as they often force the sale of an ongoing business, causing jobs to be lost in the ensuing turmoil. A recent study by Prince & Associates reported that 97% of family business heirs felt that the deceased business owner had been negligent in properly planning for succession. Although fewer than 5% of estates have a transfer tax liability, those that do face tax rates that start at 37% and climb rapidly to 55%. If there are significant assets in a qualified retirement plan and/or if grandchildren are to be the principal heirs, the combined tax rates may approach 90%. Confiscatory rates like this should encourage anyone with estate tax liabilities to start serious planning now.
Since tax laws change on a regular basis, a plan created a few years ago may be hopelessly out of date today. Neglecting to keep your estate blueprint updated is one of the major failures in estate conservation. Planning must be an ongoing process that addresses the accumulation, management and distribution of assets. In short, a good definition of estate planning is -- "I want to control my property while I'm alive, take care of myself and my loved ones if I become disabled, give what I have to whom I want, the way I want, when I want and, if I can, I want to save every last tax dollar, professional fee, and court cost possible." Who would fault such a planning concept?
It is instructive to review what happened to the Jacqueline Kennedy Onassis estate, if for no other reason than to learn how she chose to minimize the impact of taxes on her family. Granted, most estates do not have such large numbers, but the concepts still apply to many people faced with planning needs. Basically, she left specific property gifts and $600,000 to heirs and various friends. The balance of her personal property will be inherited by her children, John Jr. and Caroline. If they disclaim (choose not to receive) any of the John F. Kennedy related property, it will pass directly to the J.F.K. Library. She requested privacy for her personal papers, although she used a will instead of a living trust, which might have afforded her more control over the privacy issue. Mrs. Onassis also left $500,000 in a special charitable trust for each of her sister's children. John Jr. and Caroline each received $250,000 outright and shared in both the Martha's Vineyard property and her New York co-op apartment, while her step-brother received a Rhode Island farm. The balance of the estate's $170 million was transferred to a Charitable Lead Annuity Trust (CLAT). This specially designed trust will pay 8% of the principal amount every year to charity. After 24 years, the full amount of the trust is due to pass to John's (if any) and Caroline's children.
Why did she establish such a complex testamentary trust? There are several good reasons, not the least of which is that the principal amount in trust, plus all investment growth will pass out of her estate to heirs without owing any additional estate taxes. Current estimates indicate that there will be only an 11% reduction in the $200 million Onassis estate, instead of the 58% that would have ordinarily been lost to expenses, state and federal taxes. In the meantime, John Jr., Caroline, Mrs. Onassis' attorney and a close friend will administer the trust's annual charitable contributions and investment activities. Eventually her family may be able to further leverage that inheritance into a very significant amount totally free of tax. These family advisors will be salaried, their expenses will be paid through the trust and they will have tremendous discretion in deciding how and where to spend the trust funds.
Mrs. Onassis chose to make her grandchildren the ultimate inheritors of her trust. Although this decision will subject the trust to a Generation Skipping Transfer Tax, that will not be figured into the final calculations for another 24 years. During this time period, the Kennedy family controls the disposition of the proceeds in ways that may impact on their community in a very positive fashion. This is an excellent example of recapturing a family's "social capital" to leverage family influence and power. Historically, of all the wealthy individuals who were well known at the turn of the 20th century, only those who created charitable trusts or foundations still have name recognition today. For individuals striving for personal significance, charitable projects inside their estate plans help them achieve immortality, power and heroism. Similar programs are available to many families wishing to accomplish these same basic goals.
Charitable Lead Trusts (CLT) are designed in ways that resemble Charitable Remainder Trusts. The primary difference is that the CLT's stipulated income stream goes to a charity or foundation and the remainder interest will eventually revert back to the family. As with any split-interest gift, there is an income interest and a remainder interest on which the government allows tax deductions and administration control. Both Charitable Lead and Charitable Remainder Trusts are powerful tools effectively used in zero estate tax planning options. They require competent legal, accounting and financial services experts to work properly. Once established, they are administered by specialized trust firms and offer great flexibility to the trustees as they work to conserve family wealth. While charitable intent is important in the final decision to implement some of these advanced estate planning tools, the increased income, tax savings and the final control of assets may make these techniques work well in many asset conservation plans.
As government bureaucracies relinquish support and control of social programs to local charitable groups, it will become increasingly important for charities to learn more about ways to improve their fund raising and endowments using specialized trusts. When individuals make decisions affecting local issues, you will find that they do a better job administering those funds. The secret to their future success will be in creating the infrastructure to support necessary social, cultural and charitable programs to take advantage of the estimated $12 trillion due to change generational hands over the next few years.
Vaughn Henry deals with planned giving and estate conservation and is a member of the Central Illinois Planned Giving Council.
Disinherit the IRS
Control Family Wealth
Preserve Options and Protect Family Businesses
Eliminate Unnecessary Expenses and Taxes
Failing to stabilize and protect estate values is one of the classic errors in most estate plans. Avoid this situation
by consulting your tax, financial and legal advisors. Contact us for planning options.
Vaughn W. Henry Henry & Associates Gift and Estate Planning Services
22 Hyde Park
Springfield, IL 62703 USA
Phone: (217) 52901958 Fax: (217) 529-1959
E-mail: VWHenry@aol.com
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