Personally Designed Philanthropy

Tax Reduction Strategies

Will The System be able to satisfy the goals of every Mega-Wealthy/Billionaire individual?

Sadly, the answer is No. An article (December 1, 2003 issue of BusinessWeek) titled, “The Top Givers,” identifies (to quote the article, “… a new class of self-made super philanthropists,” with “William H. Gates III and his wife, Melinda” at the head of the class. The article, as you will see, spells out the reason for the ‘No’ answer.

The article’s subtitle is…

“Today’s philanthropists aren’t leaving the good works to future generations—they’re making their mark now.”

A few more quotes from the article should give you more insight to the passion of these super philanthropists.

“… they’re also leading the way to a new conception of responsible philanthropy. Today’s top givers are inventing a new kind of “carpe diem giving.” Instead of making promises to be fulfilled by bequest on their deaths, they’re handing over the bulk of their fortunes during their lifetimes, when they can bring vast stores of money and talent to bear on the worst problems plaguing society. Their hands-on philanthropy also allows them…

“WHY THE RUSH TO GIVE it all away? Probably the biggest reason is control. By giving now, philanthropists can make sure their gifts fund the causes they’ve chosen in the most efficient way possible, rather than trusting future foundation heads, who may be tempted to stray from the founder’s mission.”

To me the key words in the long well-written article by Michelle Conlin and Jessi Hempel are “hands-on-philanthropy” and “control.” Each “Top Giver” (on the list of “The 50 Most Generous Philanthropists”) has some interesting information about them opposite their name, including:

  • Pet causes
  • Estimated lifetime gifts (ranging from $100 million to $25 billion)
  • Current net worth

To read the entire article go to www.businessweek.com.

Wish I could help this elite group, but they don’t need me to tell them how to spend, keep or give away the wealth they earned.

PERSONALLY DESIGNED PHILANTHROPY

After finishing the article, it occurred to me that this group of 50-Mega-Wealthy/Billionaire people have created a whole new philosophy of charitable giving, which I have dubbed Personally Designed Philanthropy.

How does The System help most Mega-Wealthy/Billionaire individuals (Super-Wealthy) accomplish their goals?

To answer the question properly, we must first clearly identify (in the following outline) the most likely predominate goals for the Super-Wealthy and when The System can or cannot do its magic.

A. The System is powerless to help the Super-Wealthy accomplish their goals when they

  1. Want to give wealth away to charity during their lifetime, and/or
  2. Severely limit the amount of wealth to be left to future generations

IT SHOULD BE NOTED
A particular Super-Wealthy individual who embraces both of the above goals might not want 100% of their wealth tied to those two goals. Then the portion of their wealth not dedicated to the above goals are available to use and benefit from The System.

B. The System has been called “a Godsend” and can be used to leverage the wealth of the Super-Wealthy while accomplishing one or more of the following predominate goals. (“Leverage” here means to use your current wealth to create additional tax-free wealth.)

  1. Maximize after-tax wealth to be transferred to future generations
  2. Maximize the amount to be gifted to charity
    a) During life
    b) After death
  3. A combination of the above (Give huge sums to charity, yet increase the inheritance — after taxes — to future generations.)

ALMOST TOO GOOD TO BE TRUE
What you are about to discover is that huge amounts (millions of dollars) can be gifted to charity and the family profits (millions of additional after-tax dollars) as well as the charity.

USING THE SYSTEM TO DO “PERSONALLY DESIGNED PHILANTHROPY”

Now, let’s get back to basics: There are only two significant tax-free environments in the law:

  1. Charity
  2. Insurance

By marrying these two tax-advantaged environments, we create a stream of powerful economic forces that—over time—multiply tax-free wealth for charity, your family, and—when done properly—for both.

Some examples of how The Strategies harness the economic forces

The examples that follow show you how to accomplish the three predominate goals listed above under “B.” and to bring to life the large dollar numbers (to benefit family and charity) easily achieved by using The System.

Following are mini-case studies. Each study illustrates The Strategies used to accomplish one or more specific goals. Walt, the name of our Super-Wealthy individual, has various goals and certain assets as disclosed in each case study. Walt is 60. So is Wilma, his wife. These mini-case studies are not intended to give you all the details, but rather to show you how the goals are satisfied by selecting the proper Strategies, based on the assets Walt owns. For simplicity we only deal with a portion of Walt’s assets – $10 million or $20 million. You can add a zero or two, as you please.

Goal #1. Walt’s predominate goal is to maximize the amount of wealth to his family (children and grandchildren.)

Assets used. A $10 million portfolio of significantly appreciated stocks and income producing real estate.

Strategies used.

  1. Charitable remainder annuity trust (CRAT) that pays a 5% annuity ($500,000) to Walt and Wilma for as long as either one of them is alive.
  2. Irrevocable life insurance trust (ILIT) to own second-to-die life insurance policies on Walt and Wilma.

Income tax consequences. When the CRAT sells assets given to it by Walt, he escapes all income and capital gains taxes on the sale. Walt gets an income tax deduction for the value of the “remainder interest” of the CRAT. This deduction puts about $1.2 million in cash in his pocket (courtesy of income tax savings).

Economic consequences. Walt creates an ILIT that buys two second-to-die life insurance policies.

  • For $10 million using about $500,000 (of the $1.2 million income tax-savings cash) to by a one-time premium payment (never pays any more premiums) policy.
  • For $20 million using $240,000 (of the $500,000 annual annuity from the CRAT) to pay the annual policy premium.

FINAL ECONOMIC RESULTS
In a 55% estate tax bracket, the $10 million would have netted Walt’s family only $4.5 million.

The combination of the CRAT/ILIT strategies turns the $4.5 million into $30 million of insurance proceeds. And because the two policies are owned by an ILIT, the entire $30 million of insurance proceeds escapes all taxes: income, gift and estate.

Goal #2. Walt’s predominate goal is to maximize the amount going to charity.

Assets used. Same as in Goal #1, $10 million. Also, the annuity percent for the CRAT is 5% (or $500,000) per year.

Income tax consequences. Same as in Goal #1.

Economic consequences. This time Walt causes the ILIT to buy $15 million of second-to-die insurance; the CRAT buys $20 million.

FINAL ECONOMIC RESULTS
After both Walt and Wilma are gone:

  1. Their family will get $15 million (instead of only $4.5 million), all taxes paid in full (while Walt and Wilma get the $500,000 CRAT annuity for life).
  2. The charity will get $20 million from the insurance, plus the balance (in the $10 million range) of funds in the CRAT.

A $4.5 million after-tax number will be turned into an over $45 million after-tax number ($35 million of insurance). Plus the $10 million balance in the CRAT for charity. And don’t forget the $500,000 annuity every year for Walt and Wilma, as long as either one of them lives.

Goal #3. Walt’s predominate goal is to enrich his family and charity too.

Assets used. Some of the gifts to charity will be made to the Walt and Wilma Family Foundation (Foundation). Walt intends to have his son (Wil) and daughter (Wanda) manage the Foundation (as soon as it is created and, of course, after Walt and Wilma are gone); ultimately, the grandchildren will manage it. Wil and Wanda will receive compensation for their efforts.

Walt commits $20 million to the Plan that follows:

  1. $10 million of substantially appreciated investments to a Charitable Gift Annuity strategy (Annuity) for the benefit of his Old College.
  2. $10 million, with a tax basis of about the same amount to a Family Limited Partnership (FLIP)/Charitable Lead Annuity Trust (CLAT) strategy.

The Annuity Strategy

Walt receives a one-time income tax deduction that produces a cash in-pocket tax savings of $525,000. He uses these savings to buy $10 million of second-to-die insurance with a one-time premium (Policy #1) of $500,000. The policy is set up so the Foundation is irrevocably the beneficiary. (Note that Walt would get another income tax deduction for the amount of the one-time premium.)

For as long as Walt or Wilma lives, the Old College Annuity will pay them $540,000 a year. These funds will be taxable as follows: (1) a portion (52%) will be tax-free, which is actually the return of the $10 million; (2) a portion capital gains and (3) a portion ordinary income. Walt causes two $15 million second-to-die polices to be purchased. The annual premiums ($360,000; or $180,000 for each policy) will be paid using the $540,000 annuity funds received each year from Old College. These policies are set up:

  1. To give $15 million of the death benefit (Policy #2) irrevocably to the Foundation (Note: Each year Walt will get a deduction for the $180,000 premium paid),
  2. $15 million (Policy #3) bought by an ILIT for the benefit of the kids.

The FLIP/CLAT Strategy

The $10 million is put into a FLIP. The limited partnership units (almost the entire $10 million) of the FLIP are gifted to a CLAT. The CLAT will pay a $500,000 annuity to the Foundation each year for 20 years. The CLAT buys a $20 million second-to-die policy that is owned by the CLAT. After the 20-year term of the CLAT, it will cease to exist and all of its assets, including the $20 million life insurance policy (or the death benefit if both Walt and Wilma died during the 20-year CLAT period) will be distributed to the beneficiaries—the kids—tax free.

FINAL ECONOMIC RESULTS
Let’s tally the accomplishments of our handiwork using The System:

To
Charity
To the
Family
The Annuity Strategy:
Policy #1 $10 million
Policies #2 and #3 15 million $15 million
Old College gets balance of funds in annuity after
Walt and Wilma die
10 million
The FLIP/CLAT Strategy:
$500,000 a year for 20 years 10 million
Life insurance policy 20 million
Balance in CLAT 10 million
Totals $45 million $45 million

Not bad totals ($90 million), considering that the $20 million to fund the above would only be worth $9 million after being destroyed by an $11 million estate tax bill (in a 55% bracket).

And don’t forget, the kids and their kids will get fees (really in perpetuity) for managing the Foundation funds (in the $30 million to $35 million range).

A NOTE ABOUT PERSONALLY DESIGNED PHILANTHROPY
Each Plan that is to be established for large charitable contributions must be specially designed to meet the individual desires of the donor. It is rare that any two plans are exactly alike.

The above examples are just the tip of the iceberg as to how The System can be used to create your own Personally Designed Philanthropy Plan.

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Business-Succession

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Estate-Planning

When people of means contact me to help do their estate plans (or review their existing plans), they typically have two goals concerning their estate tax:

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- Make sure there is enough liquidity to pay the potential estate tax liability

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