Case # 8: Tandem Trust
Grace O., of Swartswood Lake, New Jersey has an estate of $4 million. Approximately $1.5 million is in an IRA and the balance is in stocks and real estate. She is a surviving spouse with four children. She would like to pass some principal when she passes away, income for a period of time and then a distribution of deferred principal. If possible, she would like to save the income tax on the $1.5 million IRA and avoid any estate taxation on the entire $4 million estate.
Her advisor suggests a tandem trust. When she passes away, the IRA will pass to an IRAtrustTM for a term of ten years. This trust will not pay the ordinary income tax on the IRA and will also produce a substantial charitable deduction of $823,542. Over the ten years, the IRAtrustTM will pay approximately $1 million in income to family members. Approximately $2.5 million of the estate is transferred into a family limited partnership.
When she passes away, the limited partnership units will be distributed to a charitable lead trust for a term of ten years. The lead trust will pay 8.65% on the underlying assets or 12.36% on the assets after a 30% FLP discount. The lead trust payout over ten years will be $1,854,000 to charity. At the end of the ten years, the lead trust value of $1,637,213 will be distributed to children.
However, the underlying assets at that point are now valued at $2,338,875.
This plan provides the children with a substantial inheritance when Grace passes away. They receive $277,143 plus over $1 million from their father’s bypass trust at that time. During the ten-year term they receive over $1 million in income.
At the expiration of the ten years, the assets from the lead trust with value greater than $2.3 million will be distributed to the children. Each of the four children will receive a total inheritance in excess of approximately $2 million. The trust planner shows Grace how the plan can reduce estate tax to zero, save the income tax on the entire IRA, move approximately $1 million per child through an inheritance and provide a very substantial distribution to her favorite charities.