Four Charitable Lead Trusts Teach an Old Dog New Tricks
Case:
Billy Jacobs, 45, was born in 1957 in Boston, Massachusetts, with a silver spoon in his mouth. Billy was the first and only child of multimillionaires Ralph and Martha Jacobs. However, Billy had very little parental involvement in his life. Martha passed away when Billy was very young, and Ralph, a notorious workaholic, was rarely home. Thus, Billy spent much of his childhood away from home at private schools. A product of little parental guidance and a very generous weekly "allowance," Billy grew up to be a poster child "spendthrift son." At the age of 45 and still receiving his weekly allowance, Billy is unmarried, unemployed, and has no savings.After many hard years of stress and long hours, Ralph's health has deteriorated. At the age of 75, Ralph has had two heart attacks, and his long-term outlook is not promising. Wanting to "do right" before his death, Ralph sought to make amends with Billy for the lack of his fatherly presence over the past 40 years. In addition to repairing the personal relationship, Ralph wanted to provide Billy with retirement security, financial responsibility and a love of philanthropy.
Question:
What planned gift would give Billy "hands-on" philanthropic involvement? How could this planned gift be structured to provide Billy with retirement security and financial responsibility?Solution:
After consulting with his attorney, Ralph decided that a Charitable Lead Trust may achieve his objectives. First, in order to involve Billy in philanthropy, the charitable beneficiary of the CLT income stream will be a donor advised fund created in Billy's name. Each year the DAF would distribute at least 5% to local charitable organizations based upon Billy's recommendation. (Editor's Note: The actual distribution decisions are made solely by the charity where the DAF was funded. However, in most cases, the charity will follow the recommendations of the donor and donor's family.) This yearly active involvement with the DAF and local charities will cultivate new personal relationships and maybe even new values for Billy.Second, in order to meet his financial goals for Billy, Ralph elected to create four-layered lead trusts. Not wanting to give Billy "too much, too fast," the layering of the lead trusts will provide Billy with principal at different stages. The different stages will, Ralph hopes, teach Billy financial responsibility. Moreover, the different stages will ensure that resources will be available for Billy's later years.
Ralph therefore created a five, 10, 15, and 20 years charitable lead annuity trusts, which accordingly will distribute assets to Billy at ages 50, 55, 60, and 65. Ralph decided to fund the longer-lasting trust with the bulk of the assets for two reasons. First, the charitable deductions will be much larger, resulting in less gift and estate taxes. Second, Billy will be older and, Ralph hopes, more financially responsible. Thus, Ralph funded the five-year CLAT with $500,000, the 10-year CLAT with $1 million, the 15-year CLAT with $2 million, and the 20-year CLAT with $5 million. Based upon an 8% payout and after applying the charitable tax deductions and his gift tax exemption, Ralph can transfer $8.5 million (plus growth) to Billy with zero gift or estate taxes. In addition, the DAF will receive over $11 million from the four lead trusts, which Billy will have a major role in distributing.
While not certain of his success, Ralph feels comfort in knowing he may finally provide Billy with some of the guidance and support he failed to give him as a child. Consequently, Ralph is very pleased with this plan, which, in addition to his personal reconciliation efforts, may help mend the broken past relationship between father and son.