Case Studies and Articles

Family Wealth and Responsibility – New Tools for Old Problems

Family Wealth and Responsibility – New Tools for Old Problems

Family Wealth and Responsibility – New Tools for Old Problems

Dr. Gerald (64) and Suzanne (62) Berger have a diversified estate with the basic estate planning provisions already in place. Like most professionals, Dr. Berger has the bulk of his estate tied up in a qualified retirement plan (QRP) which is valued in excess of $5 million. Besides owning some commercial real estate, farm ground and an appreciating stock portfolio, the Bergers also own vacation homes in two other states. With three children, the Bergers have had a lifetime commitment to their church and many charitable organizations and wanted to review their estate planning options. Their credit shelter trusts in place, and the remaining assets held in joint tenancy, it appeared that the Berger estate and income tax liabilities at death would take almost 70% of their accumulated wealth. Dissatisfied with that scenario, they asked their professional advisors to present a plan that would eliminate unnecessary taxes, assure them of retirement income security, pass their children an inheritance of $1million each and the remainder to the many charities they have supported.

The Berger’s estate assets were evaluated and those suitable for compression and distribution to family members were placed into a Family Limited Partnership (FLP). This allowed the heirs to receive “paper value” and ownership of some of the business interests and future appreciation was removed from the Berger estate. The FLP still allows Dr. Berger, through his revocable living trust, to maintain control and management as long as he retains ownership of the general partnership units, and the children and grandchildren will eventually own 99% of the limited partnership units. The farm and commercial real estate properties were examined and the advisors found that after management fees, expenses and maintenance, those properties were generating a net return of less than 2%. While the property managers noted that the real estate assets might appreciate in value, they admitted that for clients seeking less complexity in their retirement, those real properties were no longer suitable. Since the Bergers had depreciated much of the property and had low basis in their farmland, any outright sale would generate a capital gains tax at the 20% federal and 3% state rates. A more viable option was to use the §664 Charitable Remainder Trust (CRT) to control 100% of the principal. After Berger’s estate planning team suggested bypassing the capital gains tax “hit” with the CRT, a serious effort was made to see how else this split-interest trust could be made to work inside the estate plan. One of the most powerful solutions was to make use of the qualified retirement account to provide wealth replacement, retirement security and further charitable support to family philanthropies. At the Berger’s ages, it was easy to acquire an economical survivor life insurance contract and with some pension plan modification have their profit sharing plan pay for the insurance with pre-tax dollars. Later, the plan would distribute the policy to the Family Limited Partnership as a “paid-up” contract and distribute additional partnership units to children and grandchildren via annual exclusion gifts. The advisors also changed the beneficiary designations on Dr. Berger’s pension plan to name his wife as primary beneficiary and his CRT as contingent beneficiary. This strategy allows Mrs. Berger to disclaim her interest in the pension so the qualified funds would instead flow to the CRT, of which she is still an income beneficiary. In this way, Mrs. Berger will still have a option of keeping the taxable qualified funds or, if she has other adequate assets, she can allow the CRT to control those funds. The end result is that her retirement income is secure and the non-taxed CRT would pass qualified funds at her death to the newly created family foundation. The family would pay no income tax, no estate tax, the family foundation would be funded with pre-tax dollars and the CRT’s remainder interest.

To make sure each child receives their $1 million inheritance and further protect family assets from any of the heirs’ mismanagement, the Berger’s attorney drafted a new Irrevocable Life Insurance Trust (ILIT) to make use of the Berger’s remaining Unified Credit and Generation Skipping Tax Exemptions. Properly structured, the ILIT protects all of the insurance policy proceeds from estate taxes for the duration of the trust. In addition to creating a “dynasty trust” and basing it in South Dakota, the perpetual nature of the trust will control and protect family assets from taxation, litigation, divorce and spendthrifts while still providing the heirs with an opportunity to distribute and spend family wealth for many generations. Besides controlling this tax leveraged asset, there will be an additional $12 million in “social capital” controlled inside the Berger family’s charitable trust. The alternative was to pass $7 million to the IRS and leave the heirs with less, a clearly unacceptable result for a family so interested in maintaining control of their family wealth.

Henry & Associates designed the Berger scenario* and compared the options. Option (A) sell marginally productive income properties and pay the capital gains tax on the appreciation and reinvest the balance at 10% or Option (B) gifting the property to an IRC §664 Trust and reinvesting all of the sale proceeds in a 10% balanced portfolio. At the maturation of the CRT, when the surviving spouse (most likely Mrs. Berger) passes away, the capital inside the trust will pass to a family foundation with Berger heirs sitting on the board funding charitable programs of interest to their family.

Real Estate Asset Sale CRT Strategy

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Keep Asset and Do NothingSell Asset and Reinvest the Balance (A)Gift Asset to §664 CRT and Reinvest (B)
Fair Market Value of Farm and Business Property Holdings




Less: Cost of Sale (legal fees, commissions, appraiser) 



Adjusted Sales Price 



Less: Tax Basis 


Equals: Gain on Sale 


Less: Capital Gains Tax (federal and state combined) 


Net Amount at Work 



Current Net Return at 2%


Annual Return From Asset Reinvested in Balanced Acct @ 10% 


Avg. Annual Return From Asset in 5% CRUT Reinvested @ 10%  


After-Tax (42%) Avg. Spendable Income




Statistical Number of Years of Cash Flow for Income Beneficiaries 



Taxes Saved from $1,723,850 Deduction at 42% Marginal Rate  


Added Tax Savings and Cash Flow over Joint Life Expectancies