Charitable Remainder Trust Presentation
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Financial Advisor Series
Charitable Trusts
Presented by
Brett SannerRaymond James Financial
Suzanne M. GravesLaw Offices of Suzanne M. Graves, Inc.
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Estate Planning Overview
Most Estate Plans Just Don’t Work!
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Estate Planning Overview
Keys to an effective Estate Plan Proper Asset Ownership (Title) Control the Process
– Know what to do– Know how to do it– Know how to pay for it
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Estate Planning Overview
Definition of Estate Planning I want to control my property while I am
alive and well, Plan for the care of me and my loved ones
if I become disabled; When I want, give What I have to Whom I
want, and the Way I want, with fully disclosed and controlled costs to me and my family.
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Estate Planning Overview
The Estate Planning Pyramid Focuses on Client Goals “Solutions” make planning easier Exposes Traditional planning as
“upside down”
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Estate Planning Overview
Estate Planning Pyramid
“No one-size-fits-all solutions.”
taxes and costs
increasing assets
preserving your assets
information about family
Client (goals, fears, dreams)
Peter Lynch
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Estate Planning OverviewApproach
Traditional
Reactive
Truth
Proactive
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Estate Planning OverviewControl
Traditional
By Others
Truth
Rests With
Client
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Estate Planning OverviewClient Education
Traditional
Minimal,
Much After
Death
Truth
Increased and
as Soon as
Possible
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Estate Planning OverviewClient Understanding / Comfort
Traditional
Minimal / Low
Truth
Increased
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Estate Planning OverviewTeam Approach
Traditional
Infrequent Use
Truth
Requirement
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Estate Planning OverviewFunding
Traditional
After Death
(With Increased
Expense)
Truth
Current and
Continuous
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Estate Planning OverviewPersonal Instructions
Traditional
Minimal to
None
Truth
Substantial
(& Encouraged)
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Estate Planning OverviewUpdating
Traditional
Infrequent or
Non-Existent
Truth
Continuous
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Estate Planning OverviewFees
Traditional
Little Known,
Primarily after
Death
Truth
Fully Disclosed,
Higher Initially,
Lower Overall
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Legal Counselling
For an Estate Plan that will Work:1. Work with a Counseling Oriented
Attorney
2. Establish and maintain Formal Updating program
3. Assure Controlled settlement costs after death
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Legal Counselling
Some common goals we discover: Take care of family (now & later) Diversify assets/take profits without
paying capital gain tax Avoid estate taxes Support some social/charitable interest
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Legal Counselling
Clients’ choice for their wealth: Pick and allocate to at least two. At death to my Family ____% At death to my Country ____% At death to my Charities ____%
Total will equal 100%
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Charitable Planning Basics Charitable Deductions
Amount you give to charity entitles you to an income tax deduction
Write off up to 50% of your AGI Example:
– Made $80,000 this year– Contribute $20,000 to 501(c)(3) organization– Pay income tax on $60,000
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Charitable Planning Basics Charitable Deductions
Donate appreciated assets Stock you bought for $5,000 but now is
worth $20,000 If you do anything else with that stock, it is
only worth $17,000 ($3000 less) Capital gain taxes of 20% of $15,000 Contribute: tax deduction for $20,000
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Charitable Planning Basics Split Interest Gift Trusts
Form a Trust - an agreement One party gets the Income for a term - a
defined period of time The other party gets the assets later - the
RemainderWealth is like an orchard you’ve built up over a
lifetime. Taxes take the trees. When the trees are gone, no more apples!
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Charitable Remainder Trusts
Charitable Remainder Trusts – You keep the apples for life, and the charity gets
the trees when you die– Use some of the apples to replace the orchard for
your kids
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Charitable Remainder Trust
Donate an asset to the Trust highly appreciated asset works best
Sell and reinvest proceeds (diversified for safety and at higher rate of return)
Keep income (some tax-free) for life Use excess income to buy tax free
insurance policy in “ILIT” At death everything goes tax-free!
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Charitable Remainder Trust
John &
Mary
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Charitable Remainder Trust
John &
Mary
Asset placed in Trust
CRTIncomeTrust
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Charitable Remainder Trust
John &
Mary
Income for life
CRTIncomeTrust
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Charitable Remainder Trust
John &
Mary,Deceased
501(c)(3) Charity Receives remainder
CRTIncomeTrust
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Charitable Remainder Trust
John &
Mary,Deceased
501(c)(3) Charity Receives remainder
CRTIncomeTrust
The transaction is a gift to the
end Beneficiary, subject to the
retained right to income for a number of
years.
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Charitable Remainder Trust
What good is a CRT? Provide future benefit to charity of choice Take profits: Liquidate appreciated asset
without paying capital gain taxes Diversify client’s investments Current income tax deduction Removes asset from taxable estate
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Charitable Remainder Trust
Bank Stock worth $3,000,000Basis $100,000
Increase Income Current income:
– dividend 2.5% $75,000 ----------------------------------------------------------------------------------------------------------------------------------------------------
– Transfer to CRT, sell stock,
– reinvest, take 7% per year $210,000
Increase of $135,000Bonus! Up to $105,000 for 6 years is income tax
free!
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Charitable Remainder Trust
Bank Stock worth $3,000,000Basis $100,000
Avoid Capital Gain Tax/Increase Income Sell as is, lose 20% of $2.9M gain
lost $580,000; balance of $2,420,000 invested at 7% return
$169,400 -----------------------------------------------------------------------------------------------------------------------------------------------------
Using CRT, sell stock, no capital gain tax
– reinvest full $3M at 7% $210,000
Increase per year of $40,600
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Charitable Remainder Trust
Bank Stock worth $3,000,000Also avoid Estate Tax
$3M >> $2,420,000 after Cap Gain tax $580,000 Death: estate taxes (if have other assets) $1,121,700To IRS from original $3M: $1,701,700To Heirs from original $3M: $1,298,300
-----------------------------------------------------------------------------------------------------------------------------------------------------
Using CRT & investing some of the extra $40,600 into a guaranteed $3,000,000 Life Insurance Trust
To Charity at Death $3,000,000To Heirs at Death $3,000,000TO IRS: $0
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Charitable Remainder Trust PLUS
John &
Mary
Income for life
Asset placed in Trust
Charitable Remainder
Trust
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Charitable Remainder Trust PLUS
John &
Mary
Income for life
Asset placed in Trust
Charitable Remainder
Trust
From extra income, invest small Gifts into Trust
Life Insurance
Trust
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Family Receives $3,000,000
Charity Receives $3,000,000
No Death Taxes!!
Charitable Remainder Trust PLUS
John &
Mary
Income for life
Asset placed in Trust
Charitable Remainder
Trust
From extra income, invest small Gifts into Trust
Life Insurance
Trust
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CRT Variations: CRAT
Charitable Remainder Annuity Trust Income paid back to Trustmaker is a fixed
dollar amount, much like a fixed annuity for life (or a set term)
Contribute $100,000, receive an annuity payment of $7,000 per year for life
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CRT Variations: CRUT Charitable Remainder UniTrust Income paid back to Trustmaker is a
percentage of the assets in the trust each year
Contribute $100,000, receive payment equal to 7% of the first-business-day-of-year value of the trust property
May be distributing income or principal
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CRT Variations: NICRUT Net Income Charitable Remainder UniTrust Income paid back to Trustmaker is the
Actual income earned in the trust that year but not too exceed
a percentage of the assets in the trust. More like the CRUT, but pays less if
investments don’t earn enough income Theoretically never distributes principal
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CRT Variations: NIMCRUT Net Income Make-up Charitable Remainder
UniTrust Actual income earned in the trust that year but not
too exceed stated percentage When actual income is less than stated
percentage, the shortfall is accrued in a “make-up account” and may be distributed in later years when actual income exceeds percentage.
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CRT Variations: NIMCRUT
John &
Mary,Deceased
501(c)(3) Charity Receives remainder
CRTIncomeTrust
More flexibility on distributions vs. pushing growth inside the CRT
John &
Mary
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CRT Variations: FLIP-CRUT “Triggered” Charitable Remainder
UniTrust Like a CRUT but the payout is tied to
some future event, which “triggers” the start of the payments
Start making distributions when certain property is sold (until then, might be nothing available to distribute)
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Family benefit analysisNet Present Value: No CRT
$400,000 asset to sell, with zero basis NPV 20% Capital gain tax: lose $80,000 Invest remaining $320,000 at 10% to
produce $32,000/yr. income for life. Say 20 years. $272,434
At death the $320,000 goes to children $47,566 Net Present value of the income and remainder: $320,000 If estate tax reduces the principal at death by
50%, then just $160,000 would go to kids.
Net present value reduced by $23,783, to a net of $296,217
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Family benefit analysis Net Present Value: With a CRT
$400,000 asset to sell, with zero basis NPV No Capital gain tax. Invest entire $400,000 at
10% to produce $40,000/yr. income for life. Say 20 years. $340,543
Nothing goes to children at death, all to charity - 0 - Initial income tax deduction is worth at least $13,200
Net Present value of the income and remainder: $353,743
With no estate tax, family is $33,743 better off, with estate tax, they are $57,526 better off. How much better off will they be investing a little income in an ILIT!?
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CRT Income Taxation: WIFO Distributions taxed to the income beneficiary
Worst In First Out Four tiers: The most “tax expensive” income
comes out first1. Ordinary Income & Short Term Cap Gains
2. Long Term Capital Gain
3. Other (ie. muni bonds interest)
4. Return of Principal
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Marketing Opportunities:
Assets under management Sale of unmanaged assets (real estate, small business)
without capital gain tax, move assets to diverse portfolio Sale of low-income stock without capital gain tax,
reinvest in modern portfolio NIMCRUT: Variable annuity can provide the spigot
Life Insurance Replacement value for what goes to charity at death
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Another twist Charitable Lead Trust
ZERO-OUT your estate taxes At death, from Living Trust, place part of
estate in the CLT Income for a few years goes to Charity After those years, property to kids
Let charity “pick the apples” for a few years, then the kids get the trees
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Another twist Charitable Lead Trust
John &
Mary
Asset placed in Trust
Charitable LeadTrust
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Another twist Charitable Lead Trust
John &
Mary
Income
Charitable LeadTrust
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Another twist Charitable Lead Trust
John &
Mary
Children Receive Remaining assets
Charitable LeadTrust
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Basic Estate Tax Planning
John’s Death
Mary’s Death
IRS Supermarket
Children Family Trust plus Mary’s coupon, tax free;
Estate Taxes on all over that
Family Trust
(coupon)
Mary’s Living Trust
Marital Trust
John’s RLTMary’s
Living Trust
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Children
Charitable Lead Trust
Basic Estate Tax Planning plus a
Testamentary CLT
Family Trust
IRS Supermarket
Mary’s RLTMarital Trust
Mary’s RLTJohn’s RLT
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Social Capital
How to use our Social Capital Government: 1/4 gets to end user Private charity: 90% + to end user
Which makes more sense?
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The Free Bridge“I live in Alexandria, Virginia. Near the Supreme
Court chambers is a toll bridge across the Potomac. When in a rush, I pay the dollar toll and get home early. However, I usually drive outside the downtown section of the city and cross the Potomac on a free bridge.
“This bridge was placed outside the downtown Washington, DC area to serve a useful social service, getting drivers to drive the extra mile and help alleviate congestion during the rush hour.
“If I went over the toll bridge and through the barrier without paying the toll, I would be committing tax evasion. ...
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The Free Bridge“If, however, I drive the extra mile and drive
outside the city of Washington to the free bridge, I am using a legitimate, logical and suitable method of tax avoidance, and am performing a useful social service by doing so.
“For my tax evasion, I should be punished. For my tax avoidance, I should be commended.
“The tragedy of life today is that so few people know that the free bridge even exists.”
Justice Louis Brandeis
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“gains achieved unfairly”
“Over the past 12 years, trickle-down policies have benefited the wealthy at the expense of the middle class and working poor. While a privileged few have prospered, millions of Americans who work hard and play by the rules have been left behind.
Since these gains were achieved unfairly, it is time for the rich to bear the greatest burden and to do right by the people who work hard and play by the rules.”
Former President Bill Clinton - February 1993
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Who has paid enough?
“So you’ve made $20 million in your lifetime. After you paid income taxes, your net worth is $13.2 million.
“After your children pay estate taxes upon your death, it will be worth $6.33 million.
“After your grandchildren pay estate taxes on the death of your children, it will be worth $3,401,400.
“Your estate will be worth only 17% of its original value after only two generations of taxation.”
Barry Kaye, Save a Fortune on Your Estate Taxes
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Financial Advisor Series
Charitable Trusts
Presented by
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