Carl and Joanna are amateur investors who have done very well. They have some growth stocks that have gone from $100,000 just a few years ago to $200,000 today. These are not their only assets, and their estate is fairly large. They have two grown children, and also feel very strongly about leaving a positive legacy behind through some charitable giving. Being alumni of the University of North Carolina at Chapel Hill, they are also rabid basketball fans and have great disdain for Duke University. They'd like to take some income from the growth of these stocks, but there is a tax issue. If Carl were to sell his stock portfolio he'd owe capital gains taxes of 20%, or $20,000. Being a Tarheel, that rubs him the wrong way.
Is there a good way out of this dilemma for Carl?
What Would Michael Jordan Do?
One good solution to this problem would be to set up a CRT- a Charitable Remainder Trust. The CRT is an excellent vehicle for reducing taxes. With a CRT the donor sets up a trust, donates assets, then stipulates an income stream from the trust to selected beneficiaries, in this case himself and Joanna. Whenever the donor(s) die, whatever is left in the trust goes to a charity specified by Carl. Here's the steps to success:
1. Create a CRT and donate the stocks to it. Now the $20,000 capital gains tax won't have to be paid. The CRT can sell the stocks for the full $200,000 and owe no taxes. The CRT then begins lifetime payments to Carl and Joanna- let's say 10% or $20,000 a year. Carl will also get an upfront charitable deduction depending on how much income he keeps for himself.
2. Take some of the income from the CRT and purchase a sizable second-to-die life insurance policy on himself and his wife. This money will go to the kids tax-free when they die, and should at least replace the amount that is going to charity.
3. At the death of Carl and Joanna, their charity, UNC Chapel Hill will reap whatever is left in the CRT. The children will also get at least that amount, but now tax-free, as the death benefit from the life insurance policy.
4. Carl and Joanna can also begin enjoying their free basketball season tickets provided them by the University in gratitude for their generous gift. This includes tickets to the Tarheel-Duke game, where they can enjoy watching the inevitable stomping of the Blue Devils for years to come.
Everybody wins except the IRS and the Blue Devils!
Isn't Financial Planning Interesting?
By law, certain percentages must remain in a CRT, so don't expect to beat the tax-man and then take all the money as income. That being said, a CRT can have some huge advantages both now while you're alive, and leave a great legacy after you're gone.
Until next time,
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This example is for illustrative purposes only and does not take into account your particular investment objectives, financial situation or needs and may not be suitable for all investors. It is not intended to project the performance of any specific investment and is not a solicitation or recommendation of any investment strategy.