As a reminder, we in MA have a $1,000,000 estate tax. Our trusts and wills account for this. If you have any questions, always feel free to email or call the office.
By: Paul Sullivan
The New York Times
The first quarter is nearly over, and the federal government has made no move to reinstitute the estate tax. So dying today seems free, right?
There is just one problem: If you live in one of 20 states with a state estate tax, you could find your existing estate tax plans causing more harm than good.
State estate taxes are not new. They had just been a secondary element in the course of figuring out the much higher federal estate tax.
Now, the issue is sorting through wills written to maximize the old federal exemption from estate taxes — $3.5 million in 2009. In states with their own estate taxes, some of these provisions could distribute money and incur taxes in ways the deceased never expected — or maybe not if the federal estate tax is reinstated. As Jerry Weihs, director of advanced planning at Sun Life Financial, said: “We’re in a state of ambiguity.”
AUTOMATIC MISTAKES The biggest issue with the state estate taxes is wills that contain so-called formula clauses. Many wills were redrafted in the last decade to take into account the increasing federal estate tax exemption. Instead of rewriting the will every few years, clauses were put in to reflect the rising exemption amount.
Two commonly worded clauses for estates that left money in trusts could cause problems. “If the clause says you leave the applicable exclusion to your kids and the rest to a second spouse, that could now mean leaving nothing to your children since there is no applicable exclusion in 2010,” said Sharon Klein, head of wealth advisory at Lazard Wealth Management. “The other issue is if you leave the maximum that could pass free of federal tax to your children and the rest to a second wife, then it is skewed toward the kids, and the wife is disinherited.”
So far 12 states have introduced legislation to remedy this, but the proposals vary. New York, for example, looks at the intent of the will on Dec. 31, 2009, but this applies only if there is a surviving spouse. A formula clause that splits assets between nieces and charity will not function as intended. Florida’s solution could be even more contentious: it allows a judge to interpret the intent of the deceased, if a trustee or a beneficiary challenges the will.
UNEXPECTED TAXES A formula clause can also cause another costly problem. If it was written to send as much money as possible free of federal estate taxes to a credit shelter trust, the estate could pay an unexpected amount in state estate taxes.
That is because estate plans were often written so that the maximum amount that would not incur federal estate taxes would be passed to one set of heirs and the rest to a surviving spouse tax-free. In New York, which has a $1 million state exemption, the estate would have paid $229,200 in state estate taxes on the difference between the New York exemption level and the $3.5 million federal exemption.
Today, the entire estate could pass free of federal taxes. This could lead to an unexpectedly high state tax bill, said Stephen Akers, associate fiduciary counsel at Bessemer Trust. He said the tax on a $25 million estate in New York would be $3,466,800.
“In retrospect, it could be wise to pay that,” Mr. Akers said. “You might be able to avoid the federal estate tax on that much money.” But that is a big if, and it depends on whether Congress decides to make a new estate tax retroactive.
MARRIAGE PROBLEMS The absence of a federal estate tax also raises the question of whether an estate can finance a qualified terminal interest property (QTIP) trust. Such trusts hold assets left to a surviving spouse free of tax until the second spouse dies. The glitch is that a QTIP trust was typically selected when filing the federal estate tax return.
Mr. Akers said several states like Connecticut, Massachusetts and Pennsylvania have a state QTIP election and others are working on it.
In theory, people living in these states could end up far ahead of where they otherwise would have been, he said. If someone left his estate in a state QTIP trust, the surviving spouse would not have to pay estate taxes on it when she died. This is because the estate tax for the surviving spouse comes into play only if a marital deduction is allowed when the first spouse dies. Since there is no federal estate tax return to file, the marital deduction is not an option now.
Mr. Akers said this had not been tested, but it was a better option than leaving assets outright to a spouse, which would certainly be taxed when the spouse died.
Ms. Klein said she was advising clients to set up QTIP trusts, where allowed, as a hedge. By filing extensions to the estate tax returns, you could have up to 15 months to make the election, at which point the estate tax landscape should be clearer.
SNOWBIRD TRAP More jarring to retirees who escape to Florida in the winter may be a bill under debate in that state’s legislature. It proposes to tax property owned by non-Florida residents who are residents of states with state estate taxes.
This is a radical change for Florida, which has long enticed wealthy residents because it had no income or estate taxes. The proposal, on the surface, is a battle between states: Florida wants its cut of any estate tax collected by another state on Florida property. (As proposed, people who live in states without an estate tax will be exempt.) But where it would affect nonresidents is in the legal costs to make sure Florida gets its cut.
And there are also immediate costs of Congressional inaction: changing your will to reflect your state estate tax is not free. “There are going to be significant expenses for what may well be a temporary situation,” Mr. Weihs said.
Showing posts with label Massachusetts Estate Planning. Show all posts
Showing posts with label Massachusetts Estate Planning. Show all posts
Saturday, March 13, 2010
Friday, August 14, 2009
Tax Secrets of the Wealthy: Solve your business succession problem
Just in case the last article was not enough, here is another article on business secession planning. There are lots of options, but only if you plan. If we can be of any assistances, please do not hesitate to contact us.
Tax Secrets of the Wealthy: Solve your business succession problem
Marco Eagle
By: Irv Blackman
Own a family business? Want to transfer it to your kids? Then you’ll love this article. It’s about an old IRS letter ruling that is one of my favorites. It might be labeled “the lazy man’s way to plan your business transfer.” The ruling shows you how to take advantage of some favorable tax law while avoiding pitfalls. Good stuff!
There is a bit of a problem to using the technique: You see, you must drop dead before your family can enjoy the benefits of Letter Ruling 9116031.
But wait, the ruling has one redeeming quality. Really! First, the facts.
Joe, his wife Mary and their children owned all the stock in a family business. Joe died in 1990 and Mary inherited all of his stock. (Note: Mary’s tax basis — for computing capital gains — is the fair market value (FMV) of the stock on the day Joe died. For example, if the FMV was $1 million and she sold it for $1 million, there would be no capital gains tax.) Mary immediately sold all of her stock back to the corporation.
Here’s the general rule: When you or any member of your family sells stock back to your corporation (called a redemption), the redemption is usually taxed as a dividend — a tax disaster.
But there is a special tax-saving exception for a family member who has owned the stock for 10 years or more: If he/she divests all interest in the company (including any position as an officer or director), the redemption is treated as a sale (gets favorable capital gains treatment, instead of being a dividend). Since Mary sold all (stock she owned before Joe died and stock she inherited from him) of her remaining interest in the corporation, the purchase by the corporation of her shares was considered a bone fide sale (redemption) and not a dividend — a big tax victory.
When all the smoke cleared, not only had Mary escaped a big dividend income tax bill, but she has succeeded in effectively transferring the business to her children. How? Since the kids now owned all the remaining issued and outstanding stock, they owned 100 percent of the business. To sum it up: Mary walked off with a near-tax-free capital gain, (the price paid to Mary for the stock was a bit more than the exact FMV of the stock inherited from Joe) while the kids walked off with the business. A fantastic tax result.
Here’s some more good stuff about succession planning. Over the years, we have used the above ruling dozens of times with real-life clients and have nicknamed the strategy “The little guy redemption technique.” Here’s why. We use it when the seller is (1) in a very low or zero income tax bracket; (2) the stock price is (by a sort of rule-of-thumb) $600,000 or lower and (3) the seller is not worth enough to have a potential estate tax problem.
For example, the last one we did was for $380,000 for Dad No. 1, who owned 5 percent of the stock. The corporation redeemed all the stock paying the full $380,000 with a note payable over 10 years with interest at 6 percent on the unpaid balance.
Simple! Effective. Really a nice little flow of spendable cash for Dad No. 1, whose total net worth was only $800,000.
Let’s change the facts, just a bit.
Dad No. 2 (a real client from New York) is in the highest income tax bracket and estate tax bracket. Tax heaven would be to transfer his interest in the corporation (valued at $3 million) tax-free to his kids.
Dad No. 2’s succession plan must be centered around a strategy called an intentionally defective trust (IDT). An IDT is a tax-saving machine. It’s tax-free to Dad No. 2. Best of all the “buyer” of the stock (Dad’s kids) do not pay a single penny for the stock. Instead, the kids get the stock tax-free as a beneficiary of the IDT.
The lesson to be learned. Never, but never sell your stock to your kids, unless you are a little guy (as spelled out above). If transferring the stock of your family business to one or more of your children will be a tax burden to (a) you or (b) the children or (c) (in most cases) both, it is a must to find out just how much the family will save in taxes using an IDT. The rule of thumb: The savings are over $600,000 for every $1 million of the stock’s price. In real life, Dad No. 2 and his kids saved $1,920,000 in taxes (on a stock price of $3 million).
Tax Secrets of the Wealthy: Solve your business succession problem
Marco Eagle
By: Irv Blackman
Own a family business? Want to transfer it to your kids? Then you’ll love this article. It’s about an old IRS letter ruling that is one of my favorites. It might be labeled “the lazy man’s way to plan your business transfer.” The ruling shows you how to take advantage of some favorable tax law while avoiding pitfalls. Good stuff!
There is a bit of a problem to using the technique: You see, you must drop dead before your family can enjoy the benefits of Letter Ruling 9116031.
But wait, the ruling has one redeeming quality. Really! First, the facts.
Joe, his wife Mary and their children owned all the stock in a family business. Joe died in 1990 and Mary inherited all of his stock. (Note: Mary’s tax basis — for computing capital gains — is the fair market value (FMV) of the stock on the day Joe died. For example, if the FMV was $1 million and she sold it for $1 million, there would be no capital gains tax.) Mary immediately sold all of her stock back to the corporation.
Here’s the general rule: When you or any member of your family sells stock back to your corporation (called a redemption), the redemption is usually taxed as a dividend — a tax disaster.
But there is a special tax-saving exception for a family member who has owned the stock for 10 years or more: If he/she divests all interest in the company (including any position as an officer or director), the redemption is treated as a sale (gets favorable capital gains treatment, instead of being a dividend). Since Mary sold all (stock she owned before Joe died and stock she inherited from him) of her remaining interest in the corporation, the purchase by the corporation of her shares was considered a bone fide sale (redemption) and not a dividend — a big tax victory.
When all the smoke cleared, not only had Mary escaped a big dividend income tax bill, but she has succeeded in effectively transferring the business to her children. How? Since the kids now owned all the remaining issued and outstanding stock, they owned 100 percent of the business. To sum it up: Mary walked off with a near-tax-free capital gain, (the price paid to Mary for the stock was a bit more than the exact FMV of the stock inherited from Joe) while the kids walked off with the business. A fantastic tax result.
Here’s some more good stuff about succession planning. Over the years, we have used the above ruling dozens of times with real-life clients and have nicknamed the strategy “The little guy redemption technique.” Here’s why. We use it when the seller is (1) in a very low or zero income tax bracket; (2) the stock price is (by a sort of rule-of-thumb) $600,000 or lower and (3) the seller is not worth enough to have a potential estate tax problem.
For example, the last one we did was for $380,000 for Dad No. 1, who owned 5 percent of the stock. The corporation redeemed all the stock paying the full $380,000 with a note payable over 10 years with interest at 6 percent on the unpaid balance.
Simple! Effective. Really a nice little flow of spendable cash for Dad No. 1, whose total net worth was only $800,000.
Let’s change the facts, just a bit.
Dad No. 2 (a real client from New York) is in the highest income tax bracket and estate tax bracket. Tax heaven would be to transfer his interest in the corporation (valued at $3 million) tax-free to his kids.
Dad No. 2’s succession plan must be centered around a strategy called an intentionally defective trust (IDT). An IDT is a tax-saving machine. It’s tax-free to Dad No. 2. Best of all the “buyer” of the stock (Dad’s kids) do not pay a single penny for the stock. Instead, the kids get the stock tax-free as a beneficiary of the IDT.
The lesson to be learned. Never, but never sell your stock to your kids, unless you are a little guy (as spelled out above). If transferring the stock of your family business to one or more of your children will be a tax burden to (a) you or (b) the children or (c) (in most cases) both, it is a must to find out just how much the family will save in taxes using an IDT. The rule of thumb: The savings are over $600,000 for every $1 million of the stock’s price. In real life, Dad No. 2 and his kids saved $1,920,000 in taxes (on a stock price of $3 million).
Monday, August 3, 2009
Business Secession Planning Primer
We work with many clients who start to think about business secession planning. with both experienced estate planning and business attorneys here at the firm, we are able to assist clients in managing this process. This is a good article for things to begin to think about when you want to start to create a succession plan. This article is about a presentation to contractors, but it can apply to almost any business.
In Need of a Succession Plan? Here Are the Basics
American Chronicle
Have you been at the helm of your company for longer than you can remember? Do you know who will succeed you and how? Well, the experts say these are some indicators that you need to start thinking about succession planning.
While the prospect of the loss of control probably produces anxiety for you, you undoubtedly recognize the need for planning not just for your own future, but also for your employees' future as well. Shannon Affholter, a senior managerof the construction and real estate group of the accounting firm Moss Adams (Shannon.offholter@mossadams .com) and his colleague, Glenn Wattum, CPA (also of Moss Adams) presented a session at the Construction Financial Management Association's 2009 Annual Conference on succession planning for contractors.
CBMR spoke with Affholter to focus on how to get started and what is involved in the planning process. Affholter says that succession planning is an important business issue because approximately 60 percent of family-owned businesses will be changing hands in the next 10 years.
Thoughts of succession planning in the context of a family business conjure up images in my mind of the fights between J.R. and Bobby Ewing on the television series Dallas for control of the family oil business and actual "discussions" I have had with my brother and my dad (our company's president) in our company's conference room. Although we all get along well and are fairly unlike the Ewing family, power issues frequently bubble up especially when we discuss our company's long-term plans. The issues presented by a change in the business leader in a family business are often sensitive. What should happen if the company president becomes incapacitated? Which child (or should any of them) be in charge? Should the children be treated equally? Will the employees stay on with someone else as leader?
Before heading to your lawyer or accountant for planning services, it is a good idea to get a handle on the components of the process and to start thinking of the answers to some of the tough questions you'll be confronting along the way.
Affholter points out that succession planning involves more than who is next in line to take over. It has five components that need to be integrated and are interdependent. The components are business planning, ownership transition planning, succession planning, estate and tax planning, and personal wealth planning.
Business planning. This is the strategic plan that identifies where you want your business to be. It is the time to identify your long-term goals for your business. Do you want to perpetuate your business, cash out for the best possible value, or a . combo? While these are not the only options available, you need to establish what your goal is.
Ownership transition planning. If you are considering perpetuating your business, identifying viable candidates to succeed you is elemental. You will need to establish in your own mind what skills the successor needs and what level of competency is required in each. The skills you are likely evaluating are overall business competency, commitment, personal character, and leadership ability.
Frequently, the owners of family businesses begin looking at their children or other family members as their first choice for their successor. Affholter cautions that you should objectively look at the family member's skills to see whether he or she will be able to fill the role of leader. It may be difficult for you to accurately assess the person's real strengths, weaknesses, and potential. It may be helpful to have an outsider evaluate them. Affholter suggests seeing whether additional training or outside experience will get the family member to the level needed to fulfill the company's needs. It is really going to be a hard sell to your current employees to get them to respect and follow a family member who has little experience and placed at a high level in your company.
In my company, the rule of thumb seems to be that the family employee needs to work twice as hard as nonfamily employees to garner the respect of long-term employees. Your employees are looking for the same traits and confidence in your family member as they see in you. If his or her ability is not close to yours or his or her leadership skill is not readily apparent to your employees, your employees will be hard to motivate.
If you don't think you have good candidates from within your company or your family, consider a strategic hire. At this point, a tremendous amount of high-quality talent is available for hire in the industry.
If your timeline is long enough, you might consider having an in- house development program that rotates potential leadership candidates through various departments in the company, Affholter suggests.
Ownership transition planning also includes looking at how your economic interest in the business will be handled. You will need to consult your tax counsel on the most advantageous way to address this. There are quite a few options for intrafamily business transfers Affholtersuggests investigating. Some of the options include creating a limited liability company where you can establish membership interests and transfer business assets now rather than later and having a buy-sell agreement that pre-establishes purchase price and sale terms for a transfer in the future. I have also seen other owners who decided they did not want to sell their company to a third party and had no family members who could be appropriate leaders use an employee stock ownership program (ESOP) to cash out equity in their business and transfer ownership to their employees.
Management succession planning. This is the road map for read/ ing your business for your departure or readying your successorfor his or her new leadership role. If you are going to sell your business, then the plan needs to include steps and a process for making your business an attractive purchase.
If you have a successor in mind that needs additional experience or knowledge, the plan will set out the method for supplying the experience.
Personal wealth planning. In many cases, the answer to the question "What will be your monetary needs in retirement?" will determine significant elements of your business and ownership transition plan. So be prepared with at least a general answer to the question before approaching your counsel or advisor to do your succession plan.
Estate planning. The estate planning component involves developing a strategy that minimizes your estate tax burden. The strategy will have to dovetail your business plan with your other assets and your goals for the distribution of your assets upon your death. Before pursuing an integrated strategy, you might consider consulting with a tax attorney to see what options and choices you should be exploring in fashioning your overall plan. Expect that the estate planning component will involve at least your accountant and a tax attorney.
Affholter suggests that accomplishing a comprehensive succession strategy either with one professional or multiple professionals generally takes a few years. The final succession plan, Affholter cautions, often has to be fine-tuned, or modified as circumstances change.
Copyright Institute of Management & Administration Aug 2009
In Need of a Succession Plan? Here Are the Basics
American Chronicle
Have you been at the helm of your company for longer than you can remember? Do you know who will succeed you and how? Well, the experts say these are some indicators that you need to start thinking about succession planning.
While the prospect of the loss of control probably produces anxiety for you, you undoubtedly recognize the need for planning not just for your own future, but also for your employees' future as well. Shannon Affholter, a senior managerof the construction and real estate group of the accounting firm Moss Adams (Shannon.offholter@mossadams .com) and his colleague, Glenn Wattum, CPA (also of Moss Adams) presented a session at the Construction Financial Management Association's 2009 Annual Conference on succession planning for contractors.
CBMR spoke with Affholter to focus on how to get started and what is involved in the planning process. Affholter says that succession planning is an important business issue because approximately 60 percent of family-owned businesses will be changing hands in the next 10 years.
Thoughts of succession planning in the context of a family business conjure up images in my mind of the fights between J.R. and Bobby Ewing on the television series Dallas for control of the family oil business and actual "discussions" I have had with my brother and my dad (our company's president) in our company's conference room. Although we all get along well and are fairly unlike the Ewing family, power issues frequently bubble up especially when we discuss our company's long-term plans. The issues presented by a change in the business leader in a family business are often sensitive. What should happen if the company president becomes incapacitated? Which child (or should any of them) be in charge? Should the children be treated equally? Will the employees stay on with someone else as leader?
Before heading to your lawyer or accountant for planning services, it is a good idea to get a handle on the components of the process and to start thinking of the answers to some of the tough questions you'll be confronting along the way.
Affholter points out that succession planning involves more than who is next in line to take over. It has five components that need to be integrated and are interdependent. The components are business planning, ownership transition planning, succession planning, estate and tax planning, and personal wealth planning.
Business planning. This is the strategic plan that identifies where you want your business to be. It is the time to identify your long-term goals for your business. Do you want to perpetuate your business, cash out for the best possible value, or a . combo? While these are not the only options available, you need to establish what your goal is.
Ownership transition planning. If you are considering perpetuating your business, identifying viable candidates to succeed you is elemental. You will need to establish in your own mind what skills the successor needs and what level of competency is required in each. The skills you are likely evaluating are overall business competency, commitment, personal character, and leadership ability.
Frequently, the owners of family businesses begin looking at their children or other family members as their first choice for their successor. Affholter cautions that you should objectively look at the family member's skills to see whether he or she will be able to fill the role of leader. It may be difficult for you to accurately assess the person's real strengths, weaknesses, and potential. It may be helpful to have an outsider evaluate them. Affholter suggests seeing whether additional training or outside experience will get the family member to the level needed to fulfill the company's needs. It is really going to be a hard sell to your current employees to get them to respect and follow a family member who has little experience and placed at a high level in your company.
In my company, the rule of thumb seems to be that the family employee needs to work twice as hard as nonfamily employees to garner the respect of long-term employees. Your employees are looking for the same traits and confidence in your family member as they see in you. If his or her ability is not close to yours or his or her leadership skill is not readily apparent to your employees, your employees will be hard to motivate.
If you don't think you have good candidates from within your company or your family, consider a strategic hire. At this point, a tremendous amount of high-quality talent is available for hire in the industry.
If your timeline is long enough, you might consider having an in- house development program that rotates potential leadership candidates through various departments in the company, Affholter suggests.
Ownership transition planning also includes looking at how your economic interest in the business will be handled. You will need to consult your tax counsel on the most advantageous way to address this. There are quite a few options for intrafamily business transfers Affholtersuggests investigating. Some of the options include creating a limited liability company where you can establish membership interests and transfer business assets now rather than later and having a buy-sell agreement that pre-establishes purchase price and sale terms for a transfer in the future. I have also seen other owners who decided they did not want to sell their company to a third party and had no family members who could be appropriate leaders use an employee stock ownership program (ESOP) to cash out equity in their business and transfer ownership to their employees.
Management succession planning. This is the road map for read/ ing your business for your departure or readying your successorfor his or her new leadership role. If you are going to sell your business, then the plan needs to include steps and a process for making your business an attractive purchase.
If you have a successor in mind that needs additional experience or knowledge, the plan will set out the method for supplying the experience.
Personal wealth planning. In many cases, the answer to the question "What will be your monetary needs in retirement?" will determine significant elements of your business and ownership transition plan. So be prepared with at least a general answer to the question before approaching your counsel or advisor to do your succession plan.
Estate planning. The estate planning component involves developing a strategy that minimizes your estate tax burden. The strategy will have to dovetail your business plan with your other assets and your goals for the distribution of your assets upon your death. Before pursuing an integrated strategy, you might consider consulting with a tax attorney to see what options and choices you should be exploring in fashioning your overall plan. Expect that the estate planning component will involve at least your accountant and a tax attorney.
Affholter suggests that accomplishing a comprehensive succession strategy either with one professional or multiple professionals generally takes a few years. The final succession plan, Affholter cautions, often has to be fine-tuned, or modified as circumstances change.
Copyright Institute of Management & Administration Aug 2009
Monday, July 20, 2009
Charitable Remainder Trusts May Provide Benefits
We’ve attached a worthy article about Charitable Remainder Trusts “CRT”). These are important vehicles that can help client’s accomplish life planning goals (like reduced taxes and enhanced retirement income planning) while at the same time benefiting their favorite charity or group of charities. It is one piece of a bigger puzzle that could fit into your own estate plan – depending on your overall goals and objectives.
Many people don’t understand CRT’s. Hopefully, this will help bridge that gap.
CRTs may provide benefits
Times Herald Record
by Laura Medigovich
Charitable remainder trusts are gifting vehicles that provide for two sets of beneficiaries, a current income beneficiary and a remainder beneficiary.
CRTs can also provide the donor with substantial income tax savings and estate tax savings as well. In a nutshell, the donor donates an asset to a charity through a trust. The charity sells the assets and invests the proceeds. The income beneficiary receives an income stream for a term, not to exceed 20 years. At the end of the term, the remaining proceeds belong to the charity.
For illustration purposes, let's assume you are 50 years old, and you have $1 million worth of ABC stock. You purchased the stock 30 years ago for $200,000. So you have a low cost basis (the amount you paid for the stock) of $200,000. If you sold ABC stock for $1 million you would have to pay capital gains tax on $800,000 ($1 million minus $200,000 minus your cost basis equals $800,000). The federal tax bite alone would be $120,000 ($800,000 x 15 percent = $120,000).
Provides income stream
Instead, you can create an irrevocable charitable remainder trust and donate the ABC stock to "favorite" charity through the trust. The trust sells ABC stock on behalf of "favorite" charity and invests the $1 million of proceeds at a 6 percent rate of return. For the next 10 years, you receive an income stream of $50,000 a year as the income beneficiary. At the end of 10 years, "favorite" charity receives the remaining principal assets from the trust, approximately $582,065.
The above example illustrates the many benefits the donor and charity receive through a charitable remainder trust. First, our donor would receive a federal income tax deduction based on the $582,065 (the remainder amount) the charity would receive at the end of the 10-year term. Second, by gifting $1 million worth of assets, the donor has reduced his or her taxable estate, therefore creating estate tax savings. Third, the donor has also created a stream of income for himself or herself. Of course the donor has also provided the charity with a sizable donation, which is good for everyone involved.
One of the major disadvantages with a CRT is that it is irrevocable. Which means once you have donated the asset, you have lost all claims to it. So you should be confident that you have enough other assets to live comfortably, before you make the donation.
This has been a simplified discussion regarding charitable remainder trusts. When it comes to CRTs, there are several variations on the theme, such as CRATs, CRUTs and NIM-CRUTs. Each has its own nuances. As with any estate planning strategy, it is important to consult with your attorney and tax adviser to determine which is best for you and your family.
Laura Medigovich is a financial planner and assistant vice president for M&T Bank's Hudson Valley region.
Many people don’t understand CRT’s. Hopefully, this will help bridge that gap.
CRTs may provide benefits
Times Herald Record
by Laura Medigovich
Charitable remainder trusts are gifting vehicles that provide for two sets of beneficiaries, a current income beneficiary and a remainder beneficiary.
CRTs can also provide the donor with substantial income tax savings and estate tax savings as well. In a nutshell, the donor donates an asset to a charity through a trust. The charity sells the assets and invests the proceeds. The income beneficiary receives an income stream for a term, not to exceed 20 years. At the end of the term, the remaining proceeds belong to the charity.
For illustration purposes, let's assume you are 50 years old, and you have $1 million worth of ABC stock. You purchased the stock 30 years ago for $200,000. So you have a low cost basis (the amount you paid for the stock) of $200,000. If you sold ABC stock for $1 million you would have to pay capital gains tax on $800,000 ($1 million minus $200,000 minus your cost basis equals $800,000). The federal tax bite alone would be $120,000 ($800,000 x 15 percent = $120,000).
Provides income stream
Instead, you can create an irrevocable charitable remainder trust and donate the ABC stock to "favorite" charity through the trust. The trust sells ABC stock on behalf of "favorite" charity and invests the $1 million of proceeds at a 6 percent rate of return. For the next 10 years, you receive an income stream of $50,000 a year as the income beneficiary. At the end of 10 years, "favorite" charity receives the remaining principal assets from the trust, approximately $582,065.
The above example illustrates the many benefits the donor and charity receive through a charitable remainder trust. First, our donor would receive a federal income tax deduction based on the $582,065 (the remainder amount) the charity would receive at the end of the 10-year term. Second, by gifting $1 million worth of assets, the donor has reduced his or her taxable estate, therefore creating estate tax savings. Third, the donor has also created a stream of income for himself or herself. Of course the donor has also provided the charity with a sizable donation, which is good for everyone involved.
One of the major disadvantages with a CRT is that it is irrevocable. Which means once you have donated the asset, you have lost all claims to it. So you should be confident that you have enough other assets to live comfortably, before you make the donation.
This has been a simplified discussion regarding charitable remainder trusts. When it comes to CRTs, there are several variations on the theme, such as CRATs, CRUTs and NIM-CRUTs. Each has its own nuances. As with any estate planning strategy, it is important to consult with your attorney and tax adviser to determine which is best for you and your family.
Laura Medigovich is a financial planner and assistant vice president for M&T Bank's Hudson Valley region.
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