The Mastersons
Disinheriting the IRS: How one couple built a legacy of voluntary philanthropy instead of involuntary estate taxation.
Philip and Sarah Masterson are in their early 60s. In the last five years, Sarah’s father passed away and she inherited about half again her current wealth for a total of about $11,000,000. Sarah and Philip have four children, two are married and two are not. The two that are married have grandchildren and Sarah felt that she would like her children to inherit her wealth sooner than she did at age 60.
Since much of this wealth was newly acquired, Sarah and Philip had really done little with their own estate planning when we met them.
Sarah had yet to establish a personal trust in order to hold her inherited wealth in the name of the trust, which upon her death would help to simplify and reduce costs.
So that was the necessary first step.
However, they did have wills that established trusts upon their death to maximize the amount of wealth allowed
to pass to their heirs without being taxed twice at the survivor’s death, but little else had been done.
Philip and Sarah were very community minded and wanted to benefit charities in their community although none of that had been included in their estate plan. And thus their plan, when we met with them, looked like exactly half of their estate would end up with the IRS after both of their deaths and the other half would go to their children.
After spending a day with the Masterson’s in a retreat-like setting, going over much of their family history, and their goals and objectives for themselves, their children, and their community, a Family Wealth Letter of Intent was drafted and approved. Then, we were able to proceed with a new design for their estate assets.
A Family Limited Partnership was recommended in order to isolate the investment assets from the rest of their assets so that the investment assets could be treated as a separate business run as a partnership.
Teaching the next generation about the family wealth is of importance to Philip and Sarah and they thought that this would be an excellent format to use in order to do that. So a Limited Partnership was formed and $4,000,000 of stock assets were transferred into the partnership. A General Partner was chosen along with the ownership of the limited partners initially to be with Philip and Sarah.
In order to accomplish the maximum amount of charitable gifts along with family gifts without hurting Philip and Sarah’s lifestyle, $2,000,000 of limited partnership units were transferred to a Charitable Lead Trust, which will distribute income every year for 10 years to the charity or charities of the Masterson's choice. At the end of 10 years, the assets in the Charitable Lead Trust will be distributed among the Masterson's then living children or their heirs.
Four million dollars of very low basis stock that was not contributed to the Family Limited Partnership was contributed to a Charitable Remainder Trust. This trust will create income every year for Philip and Sarah, and at the end of their lives will be distributed to charity. A current charitable deduction was created relating to the remainder interest of this trust which Philip and Sarah could use on the income tax return to reduce taxable income. Philip and Sarah will be enjoying a higher income from their contributed assets than they were enjoying from the lower dividend rate from the stocks when they held them outright.
Because Philip and Sarah want to maximize assets going to charity not only now but at the time of their death, and they also wanted to be sure to leave their children a sizable estate at their death, an Irrevocable Life Insurance Trust was created to hold $4,000,000 of Life Insurance that will guarantee to pay $1,000,000 to each of their four children upon the second death of either Philip or Sarah.
Our plan continued to show that if Sarah survived Philip, she would have plenty of assets to support her for the rest of her life and it would not be until her death that a second charitable trust would be established that would also contribute income to charity for 10 years before being distributed to her heirs. The assets in the Life Insurance Trust will help the four children while they are waiting for the second Charitable Lead Trust to finish paying out to charity.
The Masterson’s were quite pleased with this new arrangement of their affairs since they could see that their children would be inheriting virtually the same dollar amount as their estate is today, while creating another $8,000,000 for charity and virtually disinheriting the government from their estate plan. Many people ask if this is legal and of course we have to answer that it is. We are only using the tax code as it exists today in order to show people a different way of paying social capital back into the fabric of society. One way is to do it in the way of taxes by becoming involuntary philanthropists, and the other way is to do it through charitable gifts while being voluntary philanthropists.
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Articles by Renata J. Rafferty, a leading advocate for informed philanthropy, and other informative snippets and reprints.
Family Retreat
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Samples of a Family Letter of Intent.
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Disinheriting the IRS: How the Mastersons built a legacy of voluntary philanthropy instead of involuntary estate taxation.