Case:

Stacy Powers, age 40, has lived a very privileged life as the only daughter of Dr. and Mrs. John Powers. When Stacy was born, it was a dream come true for the Powers. The Powers were very affluent and, during Stacy’s childhood, the Powers 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 lifestyle. While she was a good person with a good heart, the Powers felt that Stacy did not mature into a financially responsible adult.

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

Question:

What planned gift would give Stacy 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, the Powers 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 yearly, active involvement with the DAF and local charities will cultivate new personal relationships and maybe even new values for Stacy. (Editor’s note: the actual DAF distribution decisions will be made solely by the nonprofit where the DAF is funded. However, in most cases, the nonprofit will follow the recommendations of the donor and donor’s family.)

Second, in order to meet the Powers’ financial goals for Stacy, the Powers 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 principle at different stages. The Powers hope 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.

The Powers, therefore, created a 5-, 10-, 15- and 20-year CLAT, to distribute assets to Stacy at ages 45, 50, 55, and 60. The Powers 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. The Powers will be able to assist and influence their daughter’s financial decisions as she receives the distributions from the CLATs. Thus, the Powers funded the five-year CLAT 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, the Powers 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.

The Powers feel comfort in knowing that they are providing Stacy with opportunities to grow and mature as an adult. Consequently, the Powers are very pleased with this values-based lead trust plan.