Almost 20 years ago, one of my wealthy clients welcomed his first grandchild. My client’s son, the father of the grandchild, was age 34. The grandfather, age 59, wanted to make regular gifts to the grandchild and asked me, “Where do we invest the money?”
The entire family was in the maximum income and estate tax brackets, so I suggested that we explore alternative investments. Here are some of the choices we looked at:
— Taxable investments earning 9% gross or 5.67% net after paying income tax at 37%.
— Certificates of deposit earning 5% gross or 3.15% net.
— Treasury notes earning 7% gross or 4.83% net.
— Zero-coupon municipal bonds earning 5.50% net (not subject to current income tax).
— A special interest-sensitive, investment-grade life insurance contract, which at that time had a current interest assumption of 8%, tax-deferred.
Let’s see how the Legacy Trust performs. The grandfather anticipated making $10,000 annual gifts for 18 years. We created a trust, with an independent trustee, for the grandchild. This trust contained insurance on the life of the son (father of the grandchild). We suggested the minimum amount of life insurance–enough to avoid modified endowment status. This way, in the future, these funds could go to the grandchild tax-free through a series of withdrawals and policy loans. (See pages 2, 3, and 6 in the accompanying PDF document below.)
The initial face amount of the policy was about $350,000 and increased every year. Measured at the end of 18 years and 30 years, the Legacy Trust Plan significantly outperformed the other investments (see pages 4, 5, 7, and 8). This grandfather now has six grandchildren and has established a Legacy Trust for each of them. I have done the same for my two grandchildren. I really enjoy making annual gifts to their trusts for their benefit. What a great way for grandparents to leave a legacy for their grandchildren. Click here for Legacy Trust slides (PDF)
Mark L. LaVine, CLU, ChFC, is president of Professional Planning Corporation in Woodland Hills, Calif. Mark is a 46-year member of the Million Dollar Round Table. He has spoken at 17 MDRT and Top of the Table annual meetings and served as chairman of the Top of the Table in 1987. He also has served on numerous MDRT committees over the past two decades and has spoken at other industry meetings. Mark can be reached by e-mail at firstname.lastname@example.org or by phone at 818-702-0889.