Charitable Trusts Aren’t Just for the Very Wealthy
This time we hear from Meridith Hutchens, a partner at Polaris Greystone Financial Group in Houston, Texas. She recounts how she helped a client put together a charitable remainder trust (CRT) using funds from a $3 million stock holding to avoid capital gains and provide ongoing, tax-deductible retirement income.
About 16 years into my 26-year career, I started working with a couple of relatively modest means. They had made a timely investment in a technology stock that grew from an initial investment of $20,000 to $3 million. Despite this wealth they lived a very humble life. He was a car mechanic and had good benefits from his work, including a retirement account.
When it came time to plan for retirement, we started looking at what to do with this investment. This was right after 2009, and the couple had seen 40% of the stock value evaporate in the downturn, which alerted them to how quickly their wealth could disappear if the market did not stay strong.
At the same time, the couple was ready to retire and eager to harvest their asset to generate income to support their salad days. What they did not understand was if they sold and paid the substantial capital gains, they would not gain the full benefit of the wealth they had accumulated. I explained the dilemma to them and started to brainstorm possible solutions.
I needed a sounding board to talk this one out, so I set up a lunch with their lawyer. As we talked through their options we had an epiphany that the right answer might be a charitable remainder trust.
Even though I had spent my early career working in trust departments at banks I didn’t come up with this solution on my own. I think that was partly because this couple was somewhat different from other clients I had helped create trusts for in that they lived modestly and didn’t have substantial family wealth. Technology may also have been a stumbling block; the financial planning software I use only offers this type of solution when a client’s taxable estate reaches several million dollars.
On paper a CRT looked like the perfect answer to their needs. If we set up a CRT with funds from the sale of the stock, they could avoid paying capital gains on the sale and the income generated by the trust would be tax deductible. However, it also meant that in the end the funds in the trust would be donated to a charity and not inherited by family members. Both their lawyer and I were concerned about how best to present such a complex, new idea to people with relatively unsophisticated financial backgrounds.
As expected, when I presented the idea of a CRT the couple expressed concern that they would be short-changing their family if they donated the money instead of leaving it to their children. In response to these concerns I put together two illustrated projections, showing both moderate and off-the-charts growth for a hypothetical trust. In my experience illustrations are extremely helpful — not only for introducing basic concepts, but also for adjusting the variables of a situation so a client understands their options.
When this couple saw that with even minimal growth of a CRT they would be able to take care of their children, they were even more motivated to divest their stock.
We set up the CRT in 2011 after the stock had regained its value. The couple used $1 million to establish the CRT, left $1 million invested in the stock, and are planning to divest the remaining $1 million slowly over time. The trust now generates $85,000 a year, which, along with the tax deduction and their other retirement income, is more than enough to meet this couple’s lifestyle needs.
Since then, I always bring up a CRT as an option when it makes sense, regardless of my clients’ backgrounds. When my clients see that they are either going to make a very generous donation to the U.S. government or they can circumvent the capital gains and get access to a long-term income, the choice gets easier. I find that while many people are not passionate about giving away their money, at the same time they are very worried about outliving their assets, which sometimes makes a CRT the right solution.