John Li (50) is a systems engineer for one of the biggest suppliers
of sophisticated computer equipment for the Internet. He and his
wife, Katherine, have two girls, both finishing professional programs in
graduate school. As a result of prudent investing, good luck and
a wildly successful public offering of his employer's stock, John is considering
early retirement so he can travel and enjoy his hobbies of flying and sailing.
Besides his significant retirement plan account, John has $3 million in
zero basis stock in his employer's company and is in line with qualified
stock options to acquire an additional $5 million over the next three years.
Faced with planning for the disposition of an estate of $10 million (almost
all of it in an undiversified portfolio), John and Katherine decided that
they'd like to build a "Zero Estate Tax Plan" into their estate planning.
In short, they're willing to give to charity those assets that would otherwise
default to the IRS in the form of estate and capital gains taxes.
As a part of this strategy, they will also make aggressive gifts of stock
to their two daughters and other family heirs over the next few years.
By freezing estate growth and squeezing the value of the assets, the Li's
estate planning team will be able to eliminate the unnecessary taxes.
Additionally, it will provide an excellent retirement income stream and
leave their heirs in control of a family influenced charity funded with
unused retirement plan assets and stock proceeds from their charitable
remainder trust (CRT).
|
|
|
|
|
Net fair market value (FMV)
|
$3,000,000
|
$3,000,000
|
|
Taxable gain on sale
|
$3,000,000
|
|
|
Capital gains tax (20%) at federal level
|
$600,000
|
|
|
Net amount invested
|
$2,400,000
|
$3,000,000
|
|
Annual return of reinvested portfolio
|
10%
|
10%
|
|
Reinvested for 10% annual income produces
|
$240,000
|
|
|
Trust payout of 5% (averaged with 10% returns
over trust term of 40 yr.)
|
|
$433,190
|
|
Annual average after-tax cash flow @ 39% tax
|
$146,400
|
$264,246
|
|
Years - projected joint life expectancy
|
40
|
40
|
|
Taxes saved with $579,600 deduction @ 39%
|
|
$226,044
|
|
Tax savings and cash flow over 40 yr.
|
$5,856,000
|
$10,795,878
|
|
Total increase in cash flow
|
$5,856,000
|
$10,795,878
|
|
Total value of asset in estate in 40 yr.
|
$2,400,000
|
$0
|
|
Estate taxes on this asset at 55%
|
$1,320,000
|
|
|
Net value to family
|
$1,080,000
|
|
|
Total insurance expense for wealth replacement
|
$0
|
- $530,000
|
|
Insurance benefit in wealth replacement trust
|
$0
|
$3,000,000
|
|
CRT remainder value to family charity
|
$0
|
$21,119,966
|
|
Total value to Li family from this asset only
|
$1,080,000
|
$23,589,966
|
How does this work? The stock that John owns is publicly traded,
so its value is readily ascertained and is easily transferred to the Li
Family Charitable Trust. This §664 CRT will take the highly
appreciated stock and sell it without current tax liabilities and reposition
it into a more balanced portfolio of equities designed for both growth
and security. The CRT, with John as trustee, will buy and hold stocks
and mutual fund shares so that most of the portfolio will continue to appreciate
while John and Katherine, as income beneficiaries, receive quarterly payments
of 5% of the trust's value every year. They've made the decision
that leaving each daughter with a $5 million inheritance is part of their
family's financial goals, so with some stock and life insurance held in
trust, the two girls will be well protected for the future. Everything
else in their estate will be either spent during retirement or left to
their charitable trust when they pass away. After examining
the numbers, the Li family felt that it made great sense to re-exert control
over their social capital and follow through with their plan. Since John
felt a need to sell in order to diversify his unbalanced portfolio, the
only comparison to be made was between selling - paying tax - reinvesting
the net proceeds and contributing the stock - reinvesting inside the CRT.
By combining a charitable remainder trust with a wealth replacement trust
for their heirs, John leaves his family in control of the estate and produces
a "Zero Estate Tax Plan" that suits their planning goals with a family
financial philosophy of wealth preservation and charity.
Henry
& Associates
Gift
and Estate Planning Services
22 Hyde Park, Springfield, Illinois 62703-5314
217.529.1958 voice -- 217.529.1959 fax
VWHenry@aol.com
Home http://gift-estate.com/crt.html
CONTACT US FOR A FREE
PRELIMINARY CASE STUDY
FOR YOUR OWN CRT SCENARIO or try your own at
