CRT — The New Paradigm


Ed, a wealthy retiree, had a problem. The $3 million of Harris stock he had received years ago in exchange for his share of a business was paying out a meager 2˝% dividend which amounted to $75,000. While Ed was wealthy on paper his dividend income didn't allow much extra cashflow for things like travel or gifts to grandchildren. In addition, Ed felt uncomfortable having such a large portion of his portfolio in one entity. Ed considered selling, but the prospect of losing almost one third in taxes was not encouraging.

Ed came to a BFA® Family Wealth Planners (a licensed Renaissance Advisor™) seminar where we explained how Ed could sell his Harris stock, diversify … avoid capital gain tax … receive a much larger income stream during his and his wife's lifetime … receive significant tax deductions that would allow them to keep more of their earning … and to share their wealth at the second death.

Charitable Remainder Trust (CRT)

We explained that Ed could establish a CRT, give the Harris stock to it and then have the trust sell it. Since the trust is charitable in nature, there is no capital gains tax on the sale.

Next, Ed names himself as trustee, names a charitable beneficiary to receive the assets of his trust at his death, and picks a money manager to invest the funds and an administrator to oversee trust accounting, compliance and reporting. He directs his money manager to invest the $3 million. This way Ed keeps control of the use of the money, and he and his wife enjoy an income stream from the full $3 million — at 8%, for example, it would provide $240,000 a year for life. If they had sold the stock and paid taxes they would have only $2 million to invest at say 8% or $160,000 of income.

To provide for his children, Ed would acquire a joint and survivor life insurance in the amount of his gift. At his death, the policy will pay the children the amount they stood to inherit in the first place. Only they pay no inheritance tax. Ed wondered how he would pay for the premiums? From the tax savings generated by his newly created income tax deduction, we said. This sounded good, but Ed had a few more questions.

More benefits

Could he pick any charity he wanted? Yes, as long as it was qualified. Could he name more than one? Yes. Could he have some control over how the charity will use his money—and change charitable beneficiaries if they ceased to provide services in his area of interest? Of course. Could he start a family foundation to provide scholarships for some of the kids he'd worked with at the church and community center? Sure. Could his children continue to run the family foundation after he and his wife were gone? Yes. Could he change money managers if he didn't think they were getting a good return for him? Certainly. Could he change trust administrators if he didn't like the way they were handling the trust? Absolutely.

That was all Ed needed. We got together with his accountant and attorney and built a charitable remainder trust.

Today, Ed and his wife enjoy retirement and the increased income their charitable remainder trust brings…and enjoy the peace of mind that comes from knowing their children will be well provided for and their charitable interests well served.