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Planned Giving

Directing your Social Capital: Benefitting the ALR While Benefitting Yourself

Lee Resnick, Voluntary ALR Planned Giving Advisor
September 2011

Are Taxes Voluntary?

The simple answer to this question is, “NO.” Taxes must be paid.  That said, for those willing to invest some time and money in their estate planning, there are many ways to make paying estate and other taxes ‘voluntary.’

It is important to understand our system of capital.  Essentially there are two basic types of Capital: Personal Capital and Social Capital.  Personal Capital is what we get to keep out of our income and assets for investments, lifestyle, debt obligations, etc.  Social Capital is what we contribute to the greater good in the form of Taxes and Charitable contributions.  Taxes and Charity are really two parts of the same system.  What most people do not realize is that it is possible to direct our social capital to the causes and charitable organizations we care about, as opposed to just losing it to taxes.  By doing the right planning, an individual can re-direct money that would have otherwise been lost to taxes to their favorite causes, and in the process pick up significant tax forgiveness which helps with other planning objectives.

By understanding the opportunities within the Internal Revenue Code for Charitable Planning, supporters of the ALR can also produce maximum benefits for themselves while supporting the ALR.    

Why talk about this now? 

The old adage ‘timing is everything’ applies to today’s current estate tax law.  Unfortunately for most busy successful people, there never really seems to be a good time to talk about topics like death and taxes.   Fortunately, we now find ourselves in very unique economic times where the wealth preservation and shifting opportunities have never been better.  Consider that at least for the remainder of 2011 and for all of 2012, the gift and estate tax exemption has risen to $5 million dollars per individual.  From an estate planning perspective, what this means is that the next 17 months represent a tremendous opportunity for families to transfer wealth to future generations.  In addition, the government chose to put on hold their pursuit of amending the estate planning laws that relate to discounting of minority interests in closely held business interests.  This can result in even more wealth being shifted, without transfer tax consequences.  Presently, we have the lowest discount rate (also known as the hurdle rate) in history.  This is particularly useful for planning with Charitable Lead Trusts as a lower discount rate produces more benefits to estate heirs.  The new tax law has also provided portability with exemptions, meaning that it is not required that both spouses have their assets split to maximize both estate tax exemptions.    A current depressed and soft real estate market in many areas can also provide planning advantages.    Additionally, underwriters of major life insurance companies are now working with improved actuarial information regarding health conditions, and their affect on life expectancy.  As a result, people who may have previously not been able to qualify for insurance to help leverage their estate planning objectives may now be considered insurable.   The combination of all these factors has resulted in a time that has never been better or more advantageous to you, your family, and the Alliance for Lupus Research to start or enhance your estate planning. 

Unfortunately, there is no guarantee that all of the previously mentioned benefits will remain in effect.  In fact, since Income taxes were introduced in 1913 through the 16th amendment, there have been thousands of changes to the Internal Revenue Code (IRC) related to income and estate taxes.  Most don’t realize that the federal estate tax has been “permanently” REPEALED several times – and has always reappeared.  With that in mind, the idea of a true permanent repeal is probably not a realistic expectation. 

As for the future direction of taxes, we must ask ourselves “Where are we poised to go as a country with entitlement programs like Social Security and Medicare essentially bankrupt and with an escalating deficit that is requiring us to actually raise the debt ceiling?”  Also, amongst the baby boomer generation now hitting retirement age, over 90% have less than $100,000 of capital set aside for retirement.  This will only serve to exacerbate the pressure felt by these governmental programs.  Like it or not, people that have wealth and good incomes, will continue to be obvious targets for revenue generation by the IRS.  Consider that currently, over 90% of the federal income taxes paid annually are paid by the top 10% of income earners in the US. 

The supporters of the ALR are doing a lot of good for the lupus community and the government will expect more from us in the way of social capital.  It is important to get planning completed now (on your terms) and not wait to see what happens.

Doing Well By Doing Good

Most of us truly believe if given the option, we could be more efficient directing where our social capital (taxes) goes versus the government’s direction.  Believe it or not, the government agrees, and as a result they have left the majority of charitable tax related benefits available in the IRC virtually unchanged.  Philanthropic individuals have helped to build the infrastructure of this country through focused efforts that have avoided governmental bureaucracy. 

YOU have the ability to decide.  Although there has never been a better time to explore available planning opportunities to achieve maximum benefit and tax efficiency, it is crucial that you work with specialists that are familiar with complex trust work, life insurance, proper business valuation, etc.

The Estate Planner’s Toolbox

Proper Estate Planning involves planning for living your life as well as for the disposition of assets at death.  In our practice, by and large we find that most people have not maximized the available planning opportunities.  In fact, many people have not even updated their basic wills and trusts in years.  The estate planner’s toolbox is a veritable alphabet soup of Acronyms representing various types of planning strategies.  Below is a list of both basic and more advanced tools.

Basic Tools


A will is a written document that leaves the estate of the person who signed the will to named beneficiaries who may be persons or entities.   A will names an executor to manage the estate, states the authority and obligations of the executor in the management and distribution of the estate, may give funeral and/or burial instructions, nominates guardians of minor children, and spells out other terms. To be valid, the will must be signed by the person who made it, and be dated and witnessed by two or more people. Legal requirements are set by state law. If there are probate assets and/or real estate, then the will must be probated (approved by the court, managed and distributed by the executor under court supervision). If there is no executor named, an administrator will be appointed by the court. A written amendment or addition to a will is called a "codicil" and must be signed, dated, and witnessed just as is a will, and must refer to the original will it amends. If there is no probate estate, including the situation in which the assets have all been placed in a trust, then the will need not be probated.  Within the will, language for the credit shelter trust and other trusts like a QTIP trust is often found.

Living Will/Health Care Proxy:

A health care proxy is a document authorized by statutes in all states in which a person appoints someone as his/her proxy or representative to make decisions on maintaining extraordinary life-support if the person becomes too ill, is in a coma, or is certain to die. In most states the basic language has been developed by medical associations or other experts and may provide various choices as to when such maintenance of life can be terminated. The decision must be made in consultation with the patient's doctor. A living will establishes the wishes and desires of its maker regarding the use of extraordinary medical treatment. The living will permits a terminal patient to die in dignity and protects the physician or hospital from liability for withdrawing or limiting life support.

Power of Attorney:

A power of attorney is a written document signed by a person giving another person the power to act in conducting the signer's business, including signing papers, checks, title documents, contracts, handling bank accounts, and other activities in the name of the person granting the power. The person receiving the power of attorney (the agent) is "attorney in fact" for the person giving the power (the principal), and usually signs documents as "Melinda Hubbard, attorney in fact for Guilda Giver." There are two types of power of attorney: a) general power of attorney, which covers all activities, and b) special power of attorney, which grants powers limited to specific matters, such as selling a particular piece of real estate, handling certain bank accounts, or executing certain legal documents. A power of attorney may expire on a date stated in the document or upon written cancellation but will terminate upon the death of the principal. Usually the signer acknowledges before a notary public that he/she executed the power, so that it is recordable if necessary, as in a real estate transaction.


A trust is a legal entity created to own assets, manage those assets, and provide for the disposition of those assets. It may be created during your lifetime or in your will once it is probated. A trust is designed to protect and manage your property and may save on estate transfer expenses. Trusts can be used to save on probate costs at death because property placed in trust while you are living doesn't pass through probate. Trusts can provide for professional management of funds and manage assets for minor beneficiaries. Trusts also can manage funds for people with special needs – maybe a child or a relative who needs special care, or you, should you become incapacitated. Trusts can also help assure that your assets and property pass to the people you want to get them after you die.

Advanced Tools

Life Insurance:

Life insurance pays a specified sum to the beneficiaries upon the death of the insured. It is generally used to provide cash to your family in the event of your death, or it may be used to accomplish other personal, business, and estate objectives. In all cases, life insurance should be designed to replace the insured's Human Life Value (economic value). There are several types of life insurance policies. The most common types are permanent life insurance and term life insurance. Permanent life insurance provides a lifetime of protection and accrues cash value and thus offers a lifetime tax efficient savings component. Term life insurance provides protection only during a specified term and does not create a cash value.   Properly acquired and owned, life insurance can be one of the most powerful estate and distribution planning tools because of its tax favored status and the leverage involved.  In effect you are spending pennies on the dollar to solve complex estate and distribution planning issues. 

Irrevocable Life Insurance Trusts:

In an Irrevocable Life Insurance Trust, the trust creator establishes a trust to protect life insurance death benefits from estate taxes as well as to provide ongoing protection and asset management for the funds following the insured’s death.


In a Grantor Retained Annuity Trust, the grantor transfers an asset to a trust – retaining the right to annuity payments from the trust for a term of years. At the end of the term, the trust assets remaining are transferred to the designated beneficiaries. The discount on the gift tax valuation will result in a tax efficient transfer of assets from the grantor to the grantor’s heirs.


In an Intentionally Defective Grantor Trust (IDGT), the grantor creates an irrevocable trust with the intent of remaining the responsible party for income tax purposes, even while removing the transferred assets from the Grantor’s taxable estate. Pursuant to Income Tax rules, the trust grantor will be treated as the party responsible for the income tax treatment of trust assets. Pursuant to Estate Tax rules, those same trust assets are not included in the taxable estate for federal estate tax purposes.


Social capital comes in at least two forms. The tax paid on income, capital gains, or an estate is the most common form of social capital. A gift made to a charity is another common form of social capital. The tax rules permit you, within certain limits, to direct some of the social capital that is due on transfer, income or capital gains to a charity rather than to taxes.

In a Charitable Remainder Trust, the grantor transfers an asset to a trust that is considered a split interest trust. In the split interest, the grantor maintains a flow of income from the trust for life or over a predetermined period. At the end of that period, or at the Grantor’s death (or the death of a surviving spouse) the designated charities or family foundation will receive whatever assets remain in the trust.

The Grantor transfers an asset to the split interest trust and retains a right to a stream of income. The Grantor will receive a current income tax deduction based on the present value of the remainder interest payable to the charity at the end of the income term.  The charitable trust operates in a tax exempt environment.  The grantor will receive tax efficient distributions.


In a Charitable Lead Trust, the grantor transfers an asset to a trust that is considered a split interest trust. The charity receives current rights to payments from the trust. This right is generally measured by a term of years (although it can be for the life of the grantor). At the end of the time period, the charity’s rights to payments end and the trust’s designated beneficiary, generally heirs or a trust for your heirs, will receive whatever assets remain in the trust.

The main benefit of this type of trust is that the grantor may receive a current income tax deduction for the present value of the income stream payable to the charities.


In a Qualified Personal Residence Trust, the grantor’s personal residence is gifted to a trust to be held for the current benefit of the grantor and later transferred to a named beneficiary. The arrangement results in a discount on the value of the residence transferred to the named beneficiary, reducing gift and estate taxes on the residence.


With this wealth shifting strategy, personally owned assets are transferred to a Family Limited Partnership (FLP). This transaction is sometimes organized using a Limited Liability Company. The FLP is divided into two types of ownership interests: General Partner and Limited Partners Interests. Some or all of the Limited Partnership interests are gifted or sold – with the valuation often set at a discount to the full value of the assets held in the FLP. When the arrangement results in a discount, the parties reduce current gift tax results as well as future estate taxes.

Case Study:
The following example illustrates the use of how incorporating a number of the estate planning tools mentioned produces a “zero estate tax” scenario for a client using a plan called the “safety net estate plan."

Meet Sam and Cindy Sample, a husband and wife in their 60’s worth $25 million.   Sam and Cindy have 2 adult children who each have two children who are very young.  Upon discussing their goals for distribution of assets at death, they inform us that they are looking to leave each of their children 10 million dollars at death.  They would also like to establish a benefit of some sort for their grandchildren.  Finally, if there is any way to support their favorite charity, in this case the ALR, they would love to do so. 

While Sam and Cindy are living and in good health, we would take the following actions:  Although there is portability available under the current estate tax law, benefits can be realized by Sam and Cindy by establishing proper credit shelter trust planning, while getting full use of the $5m/person estate tax exemption.  We would further amend the will and add a provision to establish a Testamentary (Shows up at death) Charitable Lead Annuity Trust upon Sam and Cindy’s ultimate demise.  In order to have their stated inheritance goals met, we would help them apply for, and secure a permanent life insurance contract for $10 million of death benefit to be payable upon the second death of Sam and Cindy, and to be owned by an Irrevocable Life Insurance Trust.   During the underwriting process, we would help them to establish an ILIT, and utilize annual gifting to children and grandchildren to further reduce the size of Sam and Cindy’s taxable estate and purchase an additional $10 million of life insurance death benefit with some of the lower yielding assets in their estate.  The life insurance would be set up inside of the ILIT to keep the proceeds outside of their estate for tax purposes.  At the time of their death, the remaining $15 million in assets owned in the estate would flow through to the tax exempt TCLAT trust for the purpose of distributing income to charity, in this case the ALR, over a period of 20 years.       
Scenario at death:
At death the assets remaining in the credit shelter trust will become available as part of the kids' first inheritance.  In addition, they will also receive the death proceeds from the ILIT.  These proceeds are income and estate tax free.  As a result, the planning goal of creating a first inheritance for $10 million for each child was achieved.  That still leaves $15 million in estate assets.  Under current law, the federal estate due would be $5,250,000 (keep in mind, this figure is based on the new two year law that established a 35% estate tax rate couple with a $5m/person exemption.  Prior to this change the estate tax rate reached as high as 60% on estates worth $10,000,000 and $21,040,000).  But, because of the amendment to the language of the will, these dollars flowed through to the TCLAT established at death so that for 20 years following mom and dad’s death, a fixed annuity payment from the income produced by the assets in the trust could flow out to the ALR.  This produces enough of a tax deduction that the estate tax requirement is completely offset.  In other words, the IRS forgives the estate tax because of this couples' willingness to establish a gifting strategy to the ALR.  At the conclusion of the 20 year term all remaining assets of the $15 million, plus any additional appreciation or growth over the annuity payment to the ALR is distributed to the kids and grandkids free and clear of estate taxes.  This represents a second inheritance to generations 2 and 3.  UltimatelySam and Cindy have produced a third inheritance in the form of legacy, goodwill, and involvement with the ALR community for their ongoing support of the effort.  Along the way, the kids and grandkids got to be involved in managing their social capital for a worthy cause like the ALR. 

End result of planning:  Sam and Cindy enjoyed a great lifestyle with their estate while achieving all of their planning objectives.  net Estate taxes paid = Zero. 


It is important to know if you are truly prepared to maximize the distribution of your assets.  Take note to see if you have the correct answers to these questions:

  1. Are you aware of how directing your own social capital can lower your current income taxes?
  2. Are you aware that there is real danger in ultimately losing the vast majority of your retirement account to taxes?
  3. Is your estate plan consistent with current tax law to maximize the benefit to you, your family, and the ALR?
  4. Has proper due diligence been performed on your life insurance portfolio as it relates to your personal estate planning as well as succession planning (if you own a closely held business)?
  5. If you have a closely held business, was a proper valuation performed for estate planning purposes?

If you answered ‘no’ to any of the above questions, it is probably time for a review.

Estate planning is a process. To achieve the very best results, estate planning should be addressed with lifetime AND bequest strategies.

Due to the frequency in change and complexity of tax law it is important to review your plan frequently.  Even if you’ve done planning in the past several years, it makes sense to review and assure that you are receiving the maximum benefits from your estate plan.

Knowing that you have correct answers to the above questions and that your planning has been performed by specialists should result in the ability to direct your social capital while also enhancing benefits to you and your family.

For more information, please email plannedgiving@lupusresearch.org

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