Background: Clients were moving through our PathWise Comprehensive Financial Planning Process. During that process as they were evaluating which recommendations to implement, a stock in which client held considerable shares entered into negotiations to be sold for cash to another company.
Our Case: What we had recommended as a systematic diversification of this stock over the next five to eight years was suddenly about to be an instant cash tender causing considerable capital gains tax for the clients.
The Question: Not only did we quickly need to impact how this affected our recommended strategies, but what, if anything would be done to minimize any of the tax consequence?
The Results: The sale was going to Shareholder vote within a matter of days. It stood a very reasonable chance of passing, but was not yet a “done deal”. This gave us a window of opportunity to implement a very creative, although quite complex, strategy using a Charitable Remainder Trust.
The client established a Charitable Remainder Trust. Quick work had to be done with lawyers on both sides to ensure that the sale of the stock was not fully consummated so that the stock was eligible for such a transfer. Once determined that it was viable, $1 million of the stock was transferred to a newly established Trust.
This Trust required clients to receive annual income of 5% of the value of the Trust. In exchange for offering a substantial charitable deduction and allowing for special tax recognition on the capital gain from the sale of the stock, the Trust commits the remainder of the assets at their passing to an ultimate charity.
Insurance is used to secure a life insurance policy paid at the second death of the couple. The premium for such a policy is considerably less than the income they receive. At their ultimate death, provided all has been established properly, the policy proceeds are not included in the estate of the clients.
And the ultimate charity receiving the Trust assets at this passing happens to be a Family Fund we established where the clients’ children can then make allocations over their lifetimes to various charities important to many generations of their family.
Bottom Line: Using this technique we are able to leave the estate in the same positions but create a charitable deduction of over $300,000 while deferring capital gains of about $850,000 tax over the next 20+ years. In addition, we have moved $1,000,000 outside of the reach of the Estate Tax. Creative alternatives for tax and charitable planning are not only for the wealthiest of families; they simply need to be applied in the right settings.
This is a hypothetical example for illustrative purposes only. The experience of this client may not be representative of the experience of all clients and is not indicative of future results. Any tax advice contained herein is of a general nature and is not intended for public dissemination. Further, you should seek specific tax advice from your tax professional before pursuing any idea contemplated herein. This advice is being provided solely as an incidental service to our business as financial planner. Securities offered through ValMark Securities, Inc. Member FINRA, SIPC. Financial Planning and Investment Advisory Services offered through B & E Investment Advisers, Inc. Business & Estate Advisers, Inc. and B & E Investment Advisers, Inc. are separate entities from ValMark Securities.