The Best Financial Planning Tool

Transcription

1 The Best Financial Planning Tool The Charitable Remainder Trust Society of Financial Service Professionals, Baltimore Chapter May 6 th, 2014 Presentation by Emanuel J. Kallina, II, J.D., LL.M Kallina & Associates, LLC 100 West Road, Suite 202 Towson, MD

2 The Question Would you like to increase your assets under management, and sell replacement life insurance policies?

3 Our Thinking In the 1990 s: Charitable Remainder Trusts (CRTs) were very popular Insurance companies double-dipped (managed assets and sold replacement life insurance policies) Today: Currently $100 billion in CRTs History shows there will be another resurgence Would you like to participate?

4 Goals End goals: Gain more assets under management Sell insurance policies Serve a wider range of clients, including near-millionaires Help clients to achieve their financial and philanthropic goals Promote charity Today s goal is to convince you that: The CRT is the best financial planning tool available.

5 Part 1 The Best Financial Planning Tool The Charitable Remainder Trust

6 Part 1 Overview 1. Charitable Remainder Trusts (CRTs) 2. The CRT & Insurance 3. History repeating itself Income tax rates are up Asset values are up # of CRTs will increase 4. The math Annual contributions One-time contribution 6. The client s perspective Unknowledgeable advisors Involuntary vs. voluntary giving 7. Considerations Alternatives Overcoming unfounded concerns

7 Charitable Remainder Trusts Part 1 The Best Financial Planning Tool

8 Charitable Remainder Trusts (CRTs) Codified in the Tax Reform Act of 1969 CRT is a tax-exempt vehicle, and assets can grow tax free CRT pays income to one or more beneficiaries, typically husband and wife, until death At death of the survivor, remainder goes to charity 2 types: 1. Charitable Remainder UniTrust (CRUT) more popular 2. Charitable Remainder Annuity Trust (CRAT)

9 Insurance & the CRT Part 1 The Best Financial Planning Tool

10 The CRT & Insurance Problem: What happens if Mom and Dad die the day after they sign their CRT? All of the assets go to charity and the heirs get nothing.

11 The CRT & Insurance Solution: An Asset Replacement Trust The CRT creates a need for life insurance.

12 The CRT & Insurance End Result: There are 2 sources of revenue. 1. Money under management from CRT itself 2. Replacement life insurance policy

13 History Repeating Itself Part 1 The Best Financial Planning Tool

14 History Repeating Itself Point #1: Income tax rates are high & will go higher Point #2: Asset values are up Point #3: In a similar environment in the 1990 s, CRTs were highly popular

15 Point #1: Income Tax Rates are High Federal Only % Change Ordinary Income Tax 35.0% 44.6% 27% Capital Gains Tax 15.0% 25.0% 67% Federal & California % Change Ordinary Income Tax 43.6% 52.0% 19% Capital Gains Tax 26.3% 32.4% 23%

16 Point #1: Income Tax Rates will Go Higher Proposed higher income taxes on wealthy Most wealthy individuals are only wealthy for a one year period

17 Point #2: Asset Values are Up $18,000 DJIA Values 1992 to Present $16,000 $14,000 $12,000 $10,000 $8,000 $6,000 $4,000 $2,000 $0

18 Point #2: Asset Values are Up $14,000 DJIA Values 1995 to 2000 $12,000 $10,000 $8,000 $6,000 $4,000 $2,000 $0 1/3/1995 1/3/1996 1/3/1997 1/3/1998 1/3/1999 1/3/2000

19 Point #2: Asset Values are Up $18,000 DJIA Values March 2009 to Present $16,000 $14,000 $12,000 $10,000 $8,000 $6,000 $4,000 $2,000 $0 3/2/2009 3/2/2010 3/2/2011 3/2/2012 3/2/2013 3/2/2014

20 Number of Returns (in Existence) Point #3: In a Similar Environment 120,000 Total CRUTs By Year & Asset Size 100,000 80,000 60,000 40,000 Total Returns Under $500K $500K to $1M $1M to $3M $3M to $10M >$10M 20,000 0

21 Number of Returns (in Existence) Point #3: In a Similar Environment 100,000 90,000 80,000 Total CRUTs By Asset Size Upward trend line from 1999 to ,000 60,000 50,000 40,000 30,000 Total Returns Under $500K $500K to $1M $1M to $3M $3M to $10M >$10M Linear (Total Returns) 20,000 10,

22 Number of Returns (in Existence) Point #3: In a Similar Environment 120, ,000 Total CRUTs By Asset Size Constant trend line from 2003 to ,000 60,000 40,000 Total Returns Under $500K $500K to $1M $1M to $3M $3M to $10M >$10M Linear (Total Returns) 20,

23 Number of Returns (in Existence) Point #3: In a Similar Environment 120, ,000 Total CRUTs By Asset Size Downward trend line from 2005 to ,000 60,000 40,000 Total Returns Under $500K $500K to $1M $1M to $3M $3M to $10M >$10M Linear (Total Returns) 20,

24 Point #3: In a Similar Environment Year Total # of Returns Under $500k $500k to $1 mil $1 mil to $3 mil $3 mil to $10 mil $10+ mil % Change in Total # ,923 41,425 15,930 4,381 2, ,239 47,003 21,467 5,682 3, % ,201 56,888 13,906 9,922 2, % ,874 61,732 14,463 10,011 2, % ,371 63,880 14,782 9,311 2, % ,329 65,869 14,763 9,361 2, % ,779 66,517 15,070 9,781 2, % ,767 66,187 15,116 9,974 2, % ,567 65,371 15,806 10,631 2, % ,248 64,776 16,100 11,317 3, % ,928 66,548 15,294 10,378 2, % ,831 66,555 14,431 9,458 2, % ,828 67,211 13,897 9,366 2, % ,250 65,444 13,587 9,012 2, %

25 History Repeating Itself Point #1: Income tax rates are high & will go higher Point #2: Asset values are up Point #3: In a similar environment in the 1990 s, CRTs were highly popular

26 The Math Part 1 The Best Financial Planning Tool

27 Annual Contributions Assumptions Common Assumptions Donor ages 41, annual contributions $10,000 Adjusted basis of gift $1,000 Retirement age 65 Age at death 85 CRUT Stated amount 5% Investment return 8% Investment return Ordinary income 20% Capital gains 80% State tax rate 8% Side Fund Investment Investment return 5.33%

28 Annual Contributions Results Investment of Cash IRR 5.57% Investment of Appreciated Asset IRR 4.18% CRUT IRR 6.62% Remainder to charity $972,950

29 Cash Flow (After Tax) Annual Contributions Cash Flow $90,000 $80,000 $70,000 $60,000 $50,000 $40,000 $30,000 $20,000 $10,000 $0 -$10,000 Age Investment of Cash Investment of Appreciated Asset CRUT

30 One-Time Contribution Assumptions Common Assumptions Donor ages 41, 41 Contribution $1,000,000 Adjusted basis of gift $100,000 Retirement age 65 Age at death 85 CRUT Stated amount 5% Investment return 8% Investment return Ordinary income 20% Capital gains 80% State tax rate 8% Side Fund Investment Investment return 5.33%

31 One-Time Contribution Results Investment of Cash IRR 5.50% Investment of Appreciated Asset IRR 4.52% CRUT IRR 6.83% Remainder to charity $7,458,148

32 Cash Flow (After Tax) One-Time Contribution Cash Flow $500,000 $350,000 $200,000 $50,000 -$100,000 -$250,000 -$400,000 -$550,000 -$700,000 -$850,000 -$1,000,000 Age Investment of Cash Investment of Appreciated Asset CRUT

33 One-Time Contribution Cash Flow $10,000,000 $9,000,000 $8,000,000 $7,000,000 $6,000,000 $5,000,000 $4,000,000 $3,000,000 $2,000,000 $1,000,000 $0 Cash Flow To Donor Net to Heirs Gift to Charity Investment of Cash Investment of Appreciated Asset CRUT

34 Based upon the math The CRT is the BEST financial planning tool.

35 The Client s Perspective Part 1 The Best Financial Planning Tool

36 The Client s Perspective Clients are philanthropists: Involuntary philanthropists $ to the government Voluntary philanthropists $ to charity Historically, and certainly currently, clients would rather give to charity than to the government

37 The Client s Perspective Most advisors lack the tools and/or comfort levels to link technical counsel to more personal, values-based philanthropy planning. If their advisors are not knowledgeable about philanthropic planning, donors seek referral to others who can. Doing Well by Doing Good, a 2000 study by The Philanthropic Initiative, Inc.

38 The Client s Perspective Clients are going to give. What role will you play?

39 Considerations Part 1 The Best Financial Planning Tool

40 Alternatives There are no other viable options Tax shelters are gone No other way to obtain large income tax deductions No other way to prevent income from being taxed

41 Overcoming Unfounded Concerns Problems 1. Loss of control of principal 1. Inability to invade CRT for charity s benefit 1. Inability to borrow on monies in CRT Solutions 1. CRTs can be terminated, with the donors/income beneficiaries getting back up to 90% of the then FMV of CRT 2. A portion of a CRT can be carved out, and given to charity, and a charitable deduction obtained 3. Loans on income flow?!

42 Summary The CRT is the BEST financial planning tool available.

43 Part 2 More about the CRT Now that you care

44 Part 2 Overview 1. More reasons to create a CRT 2. Types of CRTs 3. CRT Requirements Generally Investments Payouts 4. Fiduciary income 5. The underlying math 6. When to create a CRT

45 More Reasons to Create a CRT Part 2 More about the CRT

46 More Reasons to Create a CRT Desire to: 1. Have a personal IRA 2. Control investments 3. Share in a Bull Market 4. Diversify 5. Avoid ordinary income or capital gains (e.g., developer) 6. Hedge against financial disasters ( Rainy Day Trust TM ) 7. Control income depending on needs 8. Receive income tax deduction Emanuel J. Kallina, II

47 Types of CRTs Part 2 More about the CRT

48 CRTs Charitable Remainder Unitrust (CRUT) % of FMV each year Charitable Remainder Annuity Trust (CRAT) fixed $ amount Income Only CRUT (IOCRUT) income Flip CRUT Standard CRUT (SCRUT) principal & income Net Income with Make-up CRUT (NIMCRUT) income with make-up Emanuel J. Kallina, II

49 Example #1 Common Assumptions Amount $100 Payout 7% Dividend $5 Income Principal IOU SCRUT IOCRUT NIMCRUT Emanuel J. Kallina, II

50 Examples #2 NIMCRUT $5 appreciation earned no dividends, interest, etc. Land Zero Coupon Bonds Microsoft Growth Stock VA ULP Life Insurance SMLLC No Cash Emanuel J. Kallina, II

51 Single Member LLC Appreciated Assets Step #1 Donor NIMCRUT Income Interest Appreciated Assets Step #2 NIMCRUT Buyer Cash Step #3 NIMCRUT Cash Single Member LLC 100% of all Units Emanuel J. Kallina, II

52 Fiduciary Income Part 2 More about the CRT

53 Fiduciary Income Maryland Indiana Delaware South Dakota Emanuel J. Kallina, II

54 Fiduciary Income Total Return Post Gift Appreciation Inventory Value Tax Terms don t use! Emanuel J. Kallina, II

55 CRT Requirements Part 2 More about the CRT

56 CRT Requirements Generally 1. A fixed percent or amount (between 5% and 50% of net FMV) 2. Valued annually (or initially, with a CRAT) 3. Distributed to a beneficiary (1 or more charities) 4. For a term of years (< 20), or 1 or more lives 5. With irrevocable remainder to 1 or more charities 6. CRAT or CRUT, but not a combination 7. CRT must be qualified and function as such from creation Emanuel J. Kallina, II

57 CRT Requirements Payouts 1. Timing reasonable period of time after end of the taxable year (e.g., April 15 th ) 2. Must be a fixed percentage or fraction (CRUT) or dollar amount (CRAT) Emanuel J. Kallina, II

58 CRT Requirements Investments 1. Annual realization of a reasonable amount of income or gain from the sale of assets = Trustee must not prevent 2. Commingling ok SEC No Action (6/24/1986) 3. Charity can borrow or use assets of a CRT as collateral 4. Not a CRT if no charitable deduction (e.g., paintings) Emanuel J. Kallina, II

59 The Underlying Math Part 2 More about the CRT

60 What are the Mathematics Underlying a CRT? Emanuel J. Kallina, II

61 The Underlying Math FMV of $100 Ex. Assumptions Present Value PV of Remainder Interest 1 $10 / yr for 5 8% $43 $100 - $43 = $57 2 $10 / yr for 10 8% $72 $100 - $72 = $28 3 $12 / yr for 10 8% $87 $100 - $87 = $13 4 $12 / yr for 10 6% $94 $100 - $94 = $6 Emanuel J. Kallina, II

62 When to Create a CRT Part 2 More about the CRT

63 When to Create a CRT Sale of a Business S Stock and C Stock LLC and Partnership Mergers and acquisitions Sale of Assets of a Business Farm equipment Real Estate 11/13/2013

64 When to Create a CRT Sale of Real Estate Apartment building Commercial Property Selling real estate on which accelerated depreciation has been taken Farm Second home or vacation home 11/13/2013

65 When to Create a CRT Liquidating one asset to reinvest in another asset producing a higher rate of return CD exchanged for Gift Annuity Equity rich portfolio producing 2% swapped for CRUT payout at 6% Incentive Stock Options 11/13/2013

66 When to Create a CRT Avoiding Huge Ordinary Income Taxes Hitting the lottery (dinar ship comes in ) IRAs Disposing of assets that are no longer necessary Life insurance policy Coin collection Guitar in attic 11/13/2013

67 When to Create a CRT Planning for retirement Exchanging highly appreciated equity for fixed income return of a CRAT Exchanging highly appreciated securities for fixed income investments Paying for Long Term Care Delaying income until retirement years (e.g., FLP CRUT, Spigot Trust) The Rainy Day Trust Spigot Trusts 11/13/2013

68 When to Create a CRT Diversifying highly appreciated assets QDP from ESOP into different assets Paying Down Debt Sale of business and part of stock in company used to pay down old debt 11/13/2013

69 When to Create a CRT Estate Planning Transfer estate tax dollars to charity rather than government Discount planning using a CLAT Paying IRA to CRT to benefit heirs and spread out taxes Making gifts to a brother Making gifts to a friend Zero estate planning using a CLAT 11/13/2013

70 When to Create a CRT Corporate Tax Planning Stripping cash from the business at a low cost through redemptions Family Law Planning Using a CRT to fund divorce obligations Creating a special needs trust for a child Planning for a noncitizen spouse 11/13/2013

71 When to Create a CRT Avoiding Income and Estate Taxes Super CLAT CLAT as an income averaging tool Seeing Charitable Gifts Benefit Others During Lifetime Funding Charitable Pledges Using a CLT 11/13/2013

72 When to Create a CRT Business Succession Planning Transferring corporate stock to children, through a DAF Transferring business to employees Redemptions to pass business along to next generation 11/13/2013

73 Succession Planning If the CRT works for your client when he sells his business, why wouldn t it work for you?