Larry and Page called in last week from Thousand Oaks. They had a dilemma. Larry was winding down a very successful career in the biotech industry, where he was both well compensated and received a sizeable “separation bonus” for retirement which placed him in a potentially huge federal marginal income tax bracket (in California, add state taxes to that). Larry had more than 30 patents to his credit and was proud of his role in developing cures for cancer. He felt he could beat cancer, but not taxes. Additionally, Larry and Page were fearful that a part of the stock gift (not inheritance) they had recently received from Larry’s parents, could be lost to future capital gains and estate taxes.
Wow! Capital Gains taxes and Estate taxes, a double-edged sword! Larry and Page wondered where the cure is for this dilemma. How could they legally and ethically maximize the passing of their “legacy assets” to their children?
After checking their past estate planning, identifying some highly appreciated assets in their portfolio, evaluating their current Federal tax return, and further interviewing Larry and Page, we decided to hold a conversation about “Charitable Remainder Trusts.” Their needs were clear. One, to create predictable income throughout retirement. Two, to mitigate paying any unnecessary taxes, while helping their children and the community prosper after their joint passing.
The Charitable Remainder Trust is a special tax-exempt irrevocable trust written to comply with Federal tax laws and regulations. CharitableRemainderTrust.Com states: “You can transfer cash or assets (especially appreciated assets) to the trust and may receive income for life or, if you choose, a certain term of years (not to exceed 20). In fact, the income can be paid over your life, your spouse’s life, and even your children’s and grandchildren’s lives.”
To their good fortune, Mom and Dad had gifted Larry and Page $300,000 of stock. Mom and Dad had paid $20,000 for it 20 years ago. Since it was a “gift,” not an inheritance, Larry and Page would ordinarily have to pay capital gains on the profit, upon sale of the stock. By transferring these shares into a newly created Charitable Remainder Trust the following would occur:
1. The entire $300,000 would be exempted from Larry and Page’s future potentially taxable estate.
2. Larry and Page would receive an immediate income tax deduction. The deduction is based upon the estimated present value of the remainder interest that will ultimately go to charity. We coordinated between Larry and Page’s estate planning attorney and tax preparer to determine this value, which is based upon life expectancy, income beneficiaries and expected cash flow.
3. There would be no capital gains taxes to be paid on the sale of the stock, inside of the Charitable Remainder Trust. The full value of the investment can be reinvested to generate income.
4. Larry and Page may now receive income for either a fixed period of time, or the remainder of their lives.
5. Qualified charities, of Larry and Page’s choosing (examples: Hospice, hospitals, land trusts, art and cultural centers, Rotary clubs, etc.) will be ecstatic, as beneficiaries of their goodwill.
It was a good day in Thousand Oaks. Larry and Page chose a Charitable Remainder Trust. They secured future income, reduced taxes, protected their children’s futures and did their community a great service.
The preceding article is not to be construed as investment advice or relied upon for investment decisions. Please consult your financial, tax or legal professional before taking any action. Estate planning can involve a complex web of tax rules and regulations. You should consider the counsel of an experienced estate planning professional before implementing any strategy.
For questions or suggestions, visit ostrofefinancial.com. Branch address: 565 Brunswick Road, Ste. 15, Grass Valley.