The Katsis Case

Frank and Carla Katsis are 76 and 72 years old respectively. They have three children and nine grandchildren and are a close family. They have a current net worth of a little over $11M of which $1.5M is in Frank's manufacturing business. Because of a proprietary product he has developed, he expects to sell the business for $5M in three years. About $5.6M of their net worth is invested in vacant land which is in the path of development in their community. They are in good health and lead an active lifestyle. Their current estate planning consists of revocable living trusts and a joint irrevocable life insurance trust with a $5M survivorship policy. This is just enough to pay the $5M of taxes that will be due if they both die this year. However, should they live to their life expectancies, taxes rise to $14M and the heirs will only receive $13M. Frank and Carla realized that they needed to do something about the estate tax burden and their lack of liquidity. They would also like to expand their family's charitable giving.

For Frank and Carla we implemented several strategies to help them achieve their goals. First, we established a family limited partnership (FLP) and transferred in two of their real estate properties as well as Frank's business and some of their marketable securities. Next we had Frank and Carla each establish grantor deemed owner trusts (GDOTs). After each made a cash gift to their own GDOT, they then sold their FLP interests to their GDOT in exchange for a note. In Frank and Carl's case, the note will be fully paid off when the business is sold by the GDOTs in three years. The “grantor status will then be revoked at that time and the GDOTs will become responsible for their own income taxes.

The GDOTs will purchase a new survivorship policy in the total amount of $5M. This is a specially structured policy with a premium due in the first year and then no premium payments due again for ten years. This structure is very appropriate because of the cash flow needs of Frank and Carla. The “timing” of various sales and property liquidations called for more creative cash flow modeling.

Frank and Carla each establish a qualified personal residence trust (QPRT) with their principal residence. The QPRTs each have a ten year term. At the end of the QPRT term Frank and Carla will begin paying rent to utilize the residence. The rent, however, will flow though the QPRT trust to pay the premiums on their existing life insurance policy, relieving them of the ongoing gifting that is currently taking place.

Finally, we put a testamentary charitable lead annuity trust (TCLAT) in place. This will virtually eliminate their estate taxes and satisfy their increased charitable intent.

We are now able to transfer $16M to the children immediately with another $4M coming later when the TCLAT terminates. Charity will receive $5M and taxes are only $200K. If Frank and Carla live to life expectancy, heirs will receive $24.5M immediately with $3M coming later from the TCLAT. Family charity also will get $3M and estate and income tax is virtually eliminated.