Chronic Illness: Estate, Financial and Related Planning. Martin Shenkman, CPA, MBA, JD. 90 Million Americans live with Chronic Illness – Planning Needs to be Tailored. Caveats.
Martin Shenkman, CPA, MBA, JD
90 Million Americans live with Chronic Illness – Planning Needs to be Tailored
Nothing in these slides or any accompanying presentation is to be considered legal or professional advise. The information is merely provided for educational purposes and no action should be taken without the individual consulting his or her own tax, estate, legal, financial, investment, insurance and other advisers.
Sue, a widow, has a substantial estate. Her son and only heir, David, is age 52 and has PD. He continues to work and is self supporting, although his income is declining as his symptoms have made it more difficult to work the hours he has been accustomed to. Sue wants to reduce both the potentially substantial estate tax she faces, while ensuring her son’s financial future. Shifra establishes a charitable lead annuity trust (CLAT) for her son. Sue has her attorney prepare a trust agreement and obtain a tax identification number. The trustee sets up an account with the wealth management firm Sue has used for many years. Sue then donates $1 million dollars to the CLAT.
The named charity will receive $60,000 per year for the next 25 years. Sue directs that this be used to address specific charitable objectives she feels strongly about, so long as the charity deems a need for such goals. Sue does not receive an income tax charitable contribution deduction at the time of the gift (although if she had structured the CLAT as a grantor trust she could). Assume that Sue has made prior gifts to her heirs totaling $800,000, using up $800,000 of the $1 million gift tax exclusion available (the amount any taxpayer can gift without a gift tax). A $1 million gift could generate nearly $400,000 in gift tax cost [($1 million gift – $200,000 remaining exclusion) × 50% assumed tax rate].
However, because of the annuity payment of $60,000/year for 25 years, the value of the eventual gift to her son David is reduced. Had Sue set up such a CLAT in 2007 the gift would have been reduced to about $200,000, and no gift tax would be due on the transfer. Because of the decline in interest rates, if Sue had set up such a CLAT in May 2009 she could shorten the duration of the charitable lead interest (the number of years the charity would receive $60,000 prior to her son David receiving the balance of the trust) to 20 years, and the value of the gift to David would have been only $56,000. The lower interest rates would have enhanced the gift tax advantages of the CLAT.
From a personal perspective, not only has Sue provided substantial benefit to her chosen charity, but she has provided a retirement plan for her son to ensure his financial security into old age. In 20 or 25 years (depending on when the CLAT was funded), when David reaches age 60 or 65, the CLAT will end, and he will receive a distribution of the remaining trust assets. Sue’s wealth manager believes that it is reasonable for her to realize a 7.5% return on the CLAT portfolio, given the long time horizon. As such, her son David will receive not the original $1 million she gave to the CLAT, but possibly in excess of $2 million when the trust terminates. Sue is confident that this amount will more than adequately fund her son’s retirement years.