However, if we assume that a 30% discount for lack of marketability and control applies to the limited partnership units, the value of the units sold to the trust is only $3.5 million, keeping in mind that the value of the underlying partnership assets is still $5 million. As a result, in order for the trustee to meet its note interest obligation of $175,000 (5% of $3.5 million), the total trust assets (initial gift plus the partnership units) would only have to earn approximately 2.9% to meet the interest obligation.
Sandwich 2 AppleThe benefit of using discounted assets becomes more apparent when comparing the excess amount of cash in the trust at the end of the year with and without the discount. Assuming the total trust assets earn 8% annually, the total annual income would be $480,000. In the situation where the sale price was undiscounted, the 5% interest would be $250,000 and the net in the trust after the interest payment would be $230,000. Assuming the same 30% discount as above, the annual interest payment drops to $175,000 and the net in the trust at the end of the year jumps to $305,000, an increase of $75,000.
In the normal course of events, income remaining in the trust at the end of the year is used for two purposes. First, some of the trust income may be used to pay down principal on the note. Second, the trustee may make current distributions to the trust beneficiaries, which may include the parents, children and grandchildren of the grantors.
People in the Sandwich Generation tend to like the gift-and-note strategy because, by allowing the trustee to make current distributions to the trust beneficiaries, the grantors are able to watch their entire family enjoy the fruits of the dynasty trust. However, when the trustee makes a distribution (other than a loan) from the trust assets, the amount available in the trust is reduced for the other beneficiaries, including future generations.
By using some of the excess trust income to purchase life insurance in the dynasty trust, the Sandwich Generation can create something truly savory for future generations. If the grantors' should happen to pass away before the promissory note is repaid, the life insurance proceeds provide a ready source of cash for the repayment. By including life insurance within the dynasty trust, the grantors can be assured that their family will benefit from the trust while they are alive and they will still leave a substantial legacy when they eventually pass.
Dynasty Trusts For A New Era
The
life expectancy of Americans is increasing, a factor that impacts the
dynamics of families in multiple ways. A "great-grandparent boom" is
underway, based on research from the University of California
estimating that by 2030, more than 70% of eight-year-olds will likely
have a living great-grandparent.
Although both boomers and their children may cherish great-grandparents and other older relatives, the proliferation of multigenerational families is creating new financial challenges for baby boomers and their children. Tapping into dynasty trusts at the outset of the establishment of the trust to support older generations can create resource issues, even for families transferring tens of millions of dollars to future generations. With more millionaires coming into the wealth transfer market every minute, many more families are likely to be sandwiched between competing financial goals.