Sophisticated Estate Planning with a Personal touch in Pasadena, California

(excerpted in part from Looking Ahead with Living Trusts, Mallard Pub., 1996, by Griepp & McRee)

It may sound too good to be true, but there is a way to benefit your favorite university, hospital, church, or charity, while receiving favorable tax treatment and guaranteeing income for yourself and/or others, for a period of many years.

If you are the owner of a business that has substantially appreciated in value under your care and management, you can carefully and creatively give it away, using an estate planning technique that will provide you with the funds you desire for a comfortable retirement, to educate children or grandchildren, to invest, or even to start another business. It's called a charitable remainder trust.

If you were to sell a business that had grown and prospered during the time of your ownership, you would in most cases be responsible for payment of capital gains tax, calculated on the difference between your purchase or investment price and the sale price or transfer value, less whatever you have spent to improve or upgrade the business. This capital gains tax liability can be daunting, if you are hoping to leverage your business as a retirement vehicle, or simply to cash out, for any reason.

Let's look at a charitable remainder trust, in its simplest form.
• With a charitable trust, the owner of an appreciated asset makes an outright gift of it to the trust. The asset could be a house or other real estate, stocks, valuable collectibles, or a thriving business or business inventory. The gift is made during the owner's lifetime.
• The recipient organization takes control of the business or other appreciated asset through a charitable trust, and normally arranges for its sale, relieving the donor of this responsibility. Thus, the charity accomplishes a conversion of a business to cash, without a capital gains event, and re-invests the proceeds.
• The re-investment is structured to guarantee the donor a stipend or annuity, payable on a regular basis. Some charitable trusts are set up to pay benefits to the donor for his or her lifetime, and thereafter to one or more other beneficiaries, usually for a specified time. In this way, a charitable gift can return cash to the donor and donor's heirs, in an amount equal to many times the value of the original gift.

By establishing a charitable remainder trust, you can eliminate a potential capital gains tax drain, receive substantially more than 100% of the value of your asset as ordinary income over a period of many years, and receive an immediate full (appraised) charitable deduction from your income tax, which provides you with immediate cash tax savings that can be used for anything.

One smart estate planning technique is to take the income tax savings, achieved through the large charitable deduction, and establish an irrevocable life insurance trust. The policy held within this trust can substantially leverage the liquidity of the estate, and (when properly set up and maintained) has the significant effect of segregating life insurance benefits from the estate of the insured. (Life insurance benefits are otherwise taxable as part of the estate of the insured, regardless of who receives the cash.)

This combination of techniques – the charitable remainder trust, with a companion irrevocable life insurance trust, can handily meet the retirement and estate planning goals of many business owners.

© 1999 Sharon McRee and Galen Griepp, Attorneys at Law