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 on this path. While she was a good person with a good heart, the Powers felt that Stacy did not develop as a financially mature 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 that she would simply spend it away. Instead, the Powers wanted an estate plan that provided retirement security, 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 financial responsibility?

Solution:

After consulting with their attorney, the Powers decided that a Charitable Lead Annuity Trust (CLAT) might achieve their objectives. First, in order 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 would distribute at least 5% to local charitable organizations based upon Stacy's recommendation. This yearly, active involvement with the DAF and local charities will cultivate new personal relationships and maybe even new values for Stacy. Note that the actual DAF distribution decisions are 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 the Powers' financial goals for Stacy, the Powers elected to create a four-layer lead trust. 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. The different stages hopefully 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 deductions will be much larger, resulting in less gift and estate tax. Second, Stacy will be older and hopefully more financially responsible. Thus, the Powers funded the five-year CLAT with $500,000, the 10-year CLAT with $1 million, the 15-year CLAT with $1.5 million, and the 20-year CLAT with $3 million. With this plan, the Powers will transfer $6 million (plus growth) to Stacy with zero gift or estate tax. In addition, the DAF will receive over $7 million from the four lead trusts, which Stacy will have a major role in distributing.

While not certain of its success, the Powers feel comfort in knowing that they may provide Stacy with some opportunities to grow and mature as an adult. Consequently, the Powers are very pleased with this values-based lead trust plan.