anuary 15, 2010
“Hello, Mr. Jenkins, how are you today, did you bring with you that financial statement?”
“Yup, sure did” replied Jack Jenkins, Sr. to the estate planning lawyer, Mr. Thaddeus Dobbins.
“Before I show it to you, is everything I tell you confidential?” Jack inquired. “Of course, anything you tell me is as sacrosanct as if you told it to your priest”, the lawyer responded.
As the lawyer looked at the financial statement he made some ‘hmm’ noises. After about two minutes, he looked up at Jack, Sr. “I’ve got good news and I’ve got bad news. First the good news, if you die this year, you won’t owe any estate taxes. The bad news is that you have to die this year or you will get hammered. There is a moratorium on estate taxes this year, but next year you will owe estate taxes on everything above $1.0 Million. You do get a closely held business exclusion instead of $1.5 Million, but big deal. So, you need to look into some estate planning. Given your recent DWI arrest, insurance companies would rate you for life insurance, so a life insurance trust is not an option (and it would be expensive at your age anyway). How charitably minded are you?” Lawyer Dobbins asked. “I, of course, have some great feelings for the University of Alabama, and wouldn’t mind leaving them something.” There is something called a Charitable Lead Trust. In theory, you give a chunk of your estate for a number of years to the charity and at the end of that term it goes to your family. For example, let’s say that you give $100,000,000 of your estate to such a trust, and it paid two percent to the University of Alabama every year for 20 years. You would get a tax deduction of $32,322,300. About 1/3 tax deduction. If you gave 4% per year to the University, it would total about 54,000,000 in deductions. But this would mean that the assets need to generate at least 4% per year in income.”
“Can that include rental income?” Jack asked, sheepishly. “Of course and quite frankly given that fact that you own the land that your dealerships sit on, that might be a good plan for the land which is pretty valuable.” Dobbins replied. “Yeah, the rents are already about 4%, net” he added. “The catch is that the rents would have to equal 4% of the net fair market value of the land, each year.” Dobbins responded. “So, if the land over 20 years increases to say $200,000,000, the rents would have to double over that time frame which could cause some cash flow issues for the dealerships, but also would possibly lower their value for estate tax purposes if we made the leases read that way now”, Dobbins added smartly.