Case:

Stacy, age 40, has lived a very privileged life as the only daughter of an affluent couple. When Stacy was born, it was a dream come true for her parents. During Stacy’s childhood, her parents smothered her with love, affection, time and money. Stacy soon became very accustomed to the constant “spoiling” and financial support of her parents. As a result, Stacy possessed little drive and initiative. In fact, her idea of a productive day consisted of shopping trips and hours at the salon. Throughout her adult life, Stacy continued this path. While she was a good person with a good heart, her parents felt that Stacy did not mature into a financially responsible adult.

During a visit with their estate planning attorney, Stacy’s parents expressed their concerns about Stacy. They did not want to leave their entire estate to Stacy outright because they feared she would simply spend it quickly. Instead, they wanted an estate plan that provided retirement security, fostered financial responsibility and encouraged a love of philanthropy.

Question:

What planned gift would allow Stacy to have philanthropic involvement? How could this planned gift be structured to provide Stacy with retirement security and foster financial responsibility?

Solution:

After consulting with their attorney, Stacy’s parents decided that a charitable lead annuity trust (CLAT) might achieve their objectives. First, to involve Stacy in philanthropy, the charitable beneficiary of the CLAT income stream will be a donor advised fund (DAF) created in Stacy’s name. Each year, the DAF will distribute at least 5% to local charitable organizations taking Stacy’s recommendations into consideration. This active involvement with the DAF and local charities will cultivate new personal relationships and new values for Stacy. (Editor’s note: the actual DAF distribution decisions will be made solely by the charity where the DAF is funded. However, in most cases, the charity will follow the recommendations of the donor and donor’s family.)

Second, in order to meet their financial goals for Stacy, her parents elected to create a four-layer charitable lead trust followed by a final distribution. Not wanting to give Stacy the entire estate in one instant, the layering of the lead trusts will provide Stacy with principal at different stages. Her parents hope that the different stages will teach Stacy financial responsibility. Moreover, the different stages will ensure that there will be resources available for Stacy’s later years.

Therefore, Stacy’s parents created a 5-, 10-, 15-, and 20-year CLAT to distribute assets to Stacy at ages 45, 50, 55, and 60. Her parents decided to fund the longer-lasting trust with the bulk of the assets for two reasons. First, the charitable gift tax deductions will be much larger, resulting in less gift tax. The four-layer lead trusts will also remove assets from their estate to reduce their estate tax liability. Second, Stacy will be older and hopefully more financially responsible. Stacy’s parents will be able to assist and influence their daughter’s financial decisions as she receives the distributions from the CLATs. Thus, the five-year CLAT is funded with $3 million, the 10-year CLAT with $5 million, the 15-year CLAT with $7 million and the 20-year CLAT with $10 million. With this plan, they will transfer $25 million (plus growth) to Stacy with zero gift or estate tax through the four-layer lead trust strategy. In addition, the DAF will receive over $18 million from the four lead trusts, which Stacy will have a major role in distributing.

Stacy’s parents feel comfortable knowing that they are providing Stacy with opportunities to grow and mature as an adult. Consequently, they are very pleased with this values-based lead trust plan.