¶ Intro / Opening
Welcome to A Wiser Retirement Podcast . Before we get started with the episode , I want to tell you about a new e-book available on our website called 'Buyer Beware, Why do they keep trying to sell you that annuity ? ' . This e-book covers the various types of annuities , negatives to owning annuities and better investment alternatives to annuities .
To download this e-book , you can click the link in the episode notes or go to wiser investor . com and you'll find it at the bottom of the page . Now on to today's episode .
Welcome to a Wiser Retirement Podcast . Where we believe the best financial advice should always be conflict-free . I'm your host , Casey Smith . Joining me today is Sean Shelton , partner at Moor Ingram Johnson Steel . Sean primarily works in the areas of estate tax , income planning , corporate tax planning .
Sean , we've been working together for a while now and thank you for coming on to the podcast . This is your first go on the, Wiser yes glad to be here, on A Wiser Retirement . I appreciate your time .
Thank you, No, no .
We were about to shut this down really fast . So today we're going to talk about charitable trust and we'll kind of branch off of that into some other things . But I wanted to create a scenario . We'll call them the Joneses , because we all try to keep up with the Joneses , right ?
So the Joneses have obviously done well , because everybody is trying to be them , and let's say that they have amassed an estate well above the exclusion . So when we talk about an exclusion , we're talking about an estate for husband and wife that's worth more than $25 million . So above $25 million , you pass away anything above that mark .
Today you're going to pay , or the state , the estate would pay a death tax .
Right , federal estate tax at 40% of the excess . And so , yeah , right now that number is around $25 million . It's $12.92 million per person . So for a married couple that gets it up around $25 , actually close to $26 . There's no changes in the law . There's a potential or there is a decrease that would come into effect January 1st 2026 .
And we don't know exactly where the number is going to end up because it's indexed for inflation . But basically , right now the base amount is 10 million and the inflation adjustments have gotten it up to 12.92 . In 2026 , the base amount goes from 10 million to 5 million , but you still have all the inflation adjustments .
So it's probably going to end up anywhere from 6.5 to 7.5 million per person . So then you'd be talking about anybody with an estate over 14 or 15 million could be looking at potential estate tax liability .
And that 40% , that's a lot of money .
It's pretty steep yeah .
And then some people live in states where they also have a state death tax . We don't have that in Georgia .
Correct . We do not have that in Georgia and I think there's only a few left that have that state death tax . East and Northwest Connecticut was one of them . I don't remember the other states .
Washington State I believe .
Maybe . Yeah .
So , yeah , hopefully you're not in that situation , because sometimes those are well below the federal numbers right , their exemptions may be different . Lower million , two million , you know .
Who knows ?
All right . So we're in this scenario . The Joneses are they have assets that have highly appreciated . If I get that out right assets that have highly appreciated that be like buying Apple stock as an IPO in the 80s and they sat on it right or UPS or Home Depot .
One of those , yeah exactly , or even a business that has highly appreciated in its value , and then they real estate keep going down the list . They're very , they're very charitable , they want to help others , they have plenty of resources for themselves and ultimately they're coming to us and saying , hey , we're nowhere over the exclusion .
We need to do some estate planning . What do you suggest ?
So one of the options and I guess the one that we're sort of focused on today it was a what's called a charitable remainder trust , where they take some of those low basis assets and they transfer them to a irrevocable trust . And this charitable remainder trust this is in the internal revenue code .
There's actually form form trust documents that have been prepared by the IRS . It's what's called a split interest trust , where you have a lead beneficiary who receives an income stream , either for a period of years up to 20 years or for the life of an individual , and then the remainder beneficiary that gets it when that period ends or when that life ends .
So with a charitable remainder trust , the remainder beneficiary is a charity and the lead beneficiaries usually the grantor , the person that's setting up the trust , so they can take some of these low basis , highly appreciated assets , transfer them to the trust and the trust itself is tax exempt .
So the trust can then diversify that portfolio , sell the assets without having to immediately pay income tax on it . The income tax doesn't go away because there's also a stream of income that is paid out to the grantor and we can do it as an annuity trust or a unit trust . An annuity trust . It's a fixed dollar amount from the trust every year .
That doesn't change . With the unit trust it's a fixed percentage of the value of the trust assets and you have to revalue the trust assets every year so it may increase or decrease depending on the investment performance in the trust itself . So when you liquidate that portfolio and the trust diversifies , the trust itself doesn't pay income tax .
But the distributions that are going out to the grantor or the lead beneficiary , those are includeable in their income and the nature of that income depends on the nature of the income for the trust .
So it's first ordinary income up to any income , ordinary income received by the trust , and then it goes to capital gains and then anything above that would be return of basis . That's not taxable typically .
So if we had real estate inside the trust ? And it was generating real estate income from rents that would be taxed as income as the income stream comes out to the Joneses . But if they had stock and they sold the stock and there was capital gains , then it would come out as capital gains .
Right . So if you did kind of a mix , I guess if you funded this charitable remainder trust with a combination of rental property and a low basis portfolio of publicly traded securities and let's say you've got the numbers work out that you've got $100,000 distribution to the grantor , the rental income is $50,000 .
That first $50,000 is ordinary income and then if there's capital gains from that portfolio in excess of $50,000 , then the next $50,000 would also be ordinary income and that just kind of goes on until you've . You know , if you have an ordinary income every year , then you're going to have some of that for the grantor every year .
You may use up the capital gains over time .
Is there a formula for how much income has to come out ?
There is a requirement that the remainder value of the trust has to be at least 10% of the initial contributed property . And let's say the present value of the remainder interest that's going to go to the charity has to be at least 10% of what's put in .
So if you're putting in a million dollars , the present value of that remainder interest has to be at least $100,000 . The payout amount can be anywhere from 5% to 50% and just you kind of work those numbers and part of that's up to the client .
A lot of times we're just trying to maximize the income , so we'll go as high as we can and satisfy that 10% test . If they're not as concerned about the income stream , then you may back off that a little bit and go for a higher remainder interest and the tax deduction .
You do get a tax deduction , an immediate tax deduction , based on the present value of that remainder interest when you fund the trust .
So you may want to you know you get a tax deduction based on the 10% of the million dollars maybe you put into it Correct and you know there's limitations on that Because the other portion could be pulled back out .
Well , yeah .
And the income stream .
Through the income stream . You're going to get the rest of that theoretically over the life of that trust .
But you're not paying any more tax than if you just kept it yourself .
No , and probably , if you were planning to sell it anyway , you'd end up paying less tax or at least deferring the tax . So you know , if I had a million dollar asset with a $500,000 basis , I've got a $500,000 capital gain that if I sell it I'm going to pay tax on it roughly , you know , somewhere 25% to 30% probably on that $500,000 .
If you put it into the trust you can take back the income stream . You may still end up paying close to the same amount in taxes , but you may spread it over .
Yeah , that's true , because it kind of hides inside the charitable remainder trust until you receive it , mm-hmm . Yeah , so yeah , you could delay that for up to 20 years . It sounds like .
Well , you can do a lifetime distribution on the trust , but it's just .
It depends on how long it takes to push all that gain out to you , based on what's the amount of the annuity or what's the amount of the unit trust payment each year and what was the total gain on the assets and then you pass away and these assets are now considered outside your estate .
So if we were , we had a net worth of $30 million . We put $5 million into this charitable remainder trust , the Joneses . They receive an income stream off that $5 million and immediate tax deduction of 10% , so $500,000 tax deduction right .
At least, yeah , possibly more .
And then they pass away and there wouldn't be death tax .
On the assets in the trust . On the assets inside the trust .
So if nothing else had appreciated in value , then they wouldn't have any death tax at that point .
Yeah , if we get the estate below the exemption by doing that .
And when they move the assets to the charitable trust do we have to drop our exemption ?
in any way . No , it's not a as long as the person's setting it up . So if the grantor is the one that's receiving the unit trust or annuity payments , there's no gift . There would only be a gift that you would apply to the exemption if they're naming somebody else .
So if I set this up and fund the trust with a $5 million but I name my daughter as the lead beneficiary , I've made a gift to her based on and it's valued based on what's the present value of that anticipated income stream . But in most cases , the grantor , the one who's setting it up , is the one who also receives the income payments .
So there's no gift at formation .
OK , so we have $5 million inside of trust . All that money , except for the income , would be going to the charity Correct Right . If I only deducted 10% , I died the day after I signed the documents .
It didn't work as well as it could have , probably , but it's not a total loss .
Because you're saving 40% on the death tax .
Yeah , you've removed that asset from the estate so you saved the 40% .
And this kind of ties into what you and I were talking about a little before we started that one option to try and alleviate that or replace the value of that asset that you're getting out of your estate would be to take some or all of the income stream that's generated by that charitable remainder trust .
Yeah , use that to purchase a life insurance policy and if you put the life insurance policy in an irrevocable trust , the policy itself will be out of your state .
So if I take a $5 million asset and I transfer it to the Charity Remainder trust and I take the income stream and the income stream is enough to fund the premium on preferably a second-to-die policy on myself and my wife .
Yeah .
And I have that policy owned by a trust and it purchases a $5 million policy . Then , at my death , that $5 million and the life insurance trust is available for my family , even if I die three days after I set it up Tax-free not part of your estate . Not included in your estate .
And this is the only time . It took 180 episodes , sean , 180 episodes of our podcast for me to agree that a permanent life insurance policy might be a good idea . Makes sense , because you wouldn't be funding that with term .
No , probably not .
And you also have to have decent of health to get the whole life or the universal life right .
Right , you have to be insurable as they say . But again and I have a background in insurance somewhat , so I may talk a little more about this than I should but with a married couple they don't both have to be in good health .
When you're insuring two lives , it's easier if , even if one spouse is unhealthy or would be uninsurable on their own , you can still get a policy on they covers both of them without it being
¶ Charitable Remainder Trust and Estate Planning
ridiculous . Second-to-die policy . Right . That's honestly that's the best fit for estate tax purposes , because and we didn't talk much about this for a married couple you can usually defer any estate taxes until the death of the second spouse .
Between the available exemption and the fact that you get a 100% deduction for property that passes to your spouse , you're not gonna owe any estate tax until the second death anyways , so a second-to-die policy can really make sense for that reason .
So even if you're not charitable because we try to figure out who's the candidate for this . Over the exclusion , I think is a good candidate being charitable .
I think being charitable is important and , like you said , it may not be absolutely necessary , but I think it's a harder sell for somebody that's not already interested in supporting some charitable organizations .
Yeah , so over the exemption has a highly appreciated asset or portfolio that they may be looking to diversify a little bit and that also has , I think , the potential for significant gain of the future on that portfolio . That would just add to if it continues to grow . It's just gonna add to their estate tax problem .
Yeah , absolutely so . Then there's a whole another component to this is you might say well , man , that's a lot of money to give to one organization . Obviously , you can name multiple organizations that would be the beneficiaries of that .
But what if , instead of going to that single organization , you use something like the Cobb Community Collaborative and it went into a donor advise fund ?
Yep , you can do that , and then I believe you can set it up that way , and then you can even designate the family members or whoever you want to act as the board or the trustees for that fund , so that after your death , when the property goes to the foundation , they're able to make recommendations as far as who the grants should go to , who the actual
charities that should benefit from that money .
Yeah , so now you have a family board as part of the donor advice fund , now that that money can't go to Uncle Harry and his scholarship .
It has to go to , it has to qualify charities , yeah 501c3 , irs qualified charities .
But that money at that point really leaving a legacy we talk about legacy here all the time but you're really leaving a legacy of family members taking that asset and then helping other nonprofits . And that money could be invested still inside like a traditional index portfolio .
Right , family members could continue to contribute to it if they want to . So yeah , like you said , I think , building a legacy of family involvement in philanthropy .
Yeah , I know , I know other things . All right , so that was quick we got through that Now . We're now experts in charitable remainder trust .
That wasn't a deep dive , but we covered kind of the basics .
What , how many hours does it take typically to to build something like this ?
For me ?
Well , I'm not necessarily looking for what the cost is , but I'm more of like how many meetings I have a you know what's what's a person's journey to get through all this , because you have your other estate . That's a part of this too , so you have to cap . Look at the whole picture . This is not a come in set up over one meeting .
This is probably what four or five meetings right and I'd say this is probably not the first thing you're gonna do .
So the first thing we would do is we would meet and and talk about what I would call your foundational documents and make sure we've got a will in place or a revocable trust , and for somebody with a taxable estate that builds in some tax planning , like I was talking about earlier , to make sure that any taxes that are due would be deferred if they're married
until the death of the second spouse , yeah , get that in place along with things like a power of attorney and a health care directive , and this is more in the category of advanced planning that you turn to once you've done all that , and then we start looking at how can we reduce the estate if they're over the exemption , to try and get it below that exemption
amount . So the end yeah , it would be . You know we'd have probably , once we get those foundational documents , would be a separate meeting to talk about the charitable trust . How much are we looking to fund in there ? What sort of asset are they putting in there ? And a lot of that they're determining .
I may help them kind of figure out , but there's usually , you know , an asset that they have in mind , like you said , that got concentrated position in one stock that they bought in an IPO 20 , 30 years ago . That's appreciated greatly . Yeah , they're worried about you know , if they sell it they're going to take a big tax hit .
And look at you know , okay , well , that's what we're planning for , this is what we're going to fund the trust with . And then we start looking at the mechanics of the Trust and saying , okay , do we want it to be ?
Is it going to be a period of time I guess you can do up to 20 years as a , as a fixed period or do you want it to be for life , that you're continuing to receive that payout ? And then I'd say that's probably the most common . You see the unit trust or annuity trust payments coming back to the grantor for life .
Then we run some calculations and figure out what's the payout percentage that we can use that will satisfy that 10% requirement and make sure we leave the 10% to the charity . And then start , you know , put , put a draft of the trust together , maybe let them review it , see if maybe have another meeting to go over it and and address any questions they have .
And then you know , get it signed and get . Get everything transferred into the name of the trust .
We're gonna see , I think in the future , at least in our client base , probably really large IRAs . Is there any way to have IRA money or IRA funds end up in a charitable remainder trust ?
I don't . I don't think you could do it without taking it out of the IRA first and paying the income taxes .
But I think a better way to achieve charitable planning with the IRA would just be to name a charity as a beneficiary of the IRA , because then you know , if you name your spouse still has the ability , if your spouse is the beneficiary of an IRA , to stretch that money out over their life expectancy and continue the tax deferral .
So I think I tell people you still want your spouse as the primary beneficiary on those kinds of accounts . But , if your spouse pre-diseases you and you're wanting to direct some money to charity , it's a good way to do .
It is to name a charity as a you know , maybe a partial beneficiary on the IRA , because the charity doesn't have to worry about all those tax issues . They come with , inherited an IRA , they don't have to pull the money out within 10 years , then they don't have to pay tax on it . They can take it all .
So you're you know you're benefiting the charity more than a you know just an individual who receives it and has to pay all the tax on that .
Yeah , you do have the option . With your recarbonation or distributions , up to a hundred thousand dollars can go directly to charity , not be counted towards your income . I forgot about that , that's true . But that's , that's , that's for a charitable person . But a person just is believes the charity starts at home .
As up here , some of our clients say , if you're not charitable , charitable inclined , you're probably not giving away the money . If you're gonna pay tax and and and reinvest that money back into your brokerage account or into something else , give it to family or something like you said . Yeah , yeah , exactly so .
So really you know there's really no way to shelter that . And you know because even in this other charitable remainder trust , you still have that life insurance option . So you know that you're still making your family a whole . You didn't give away their inheritance , right ?
Right again and it may not always be an option because I guess it is dependent on are you in good enough health that you can ? You can get that insurance policy right .
But yeah , there's a ways to you know , and and that may be a factor in considering it that if the if they're really concerned about well , I don't want to do it , if I can't get that insurance policy then when we kind of do it in tandem , get them underwritten and see if we can qualify for a policy before we kind of pull the trigger on doing the
charitable remainder trust in the first place . And I guess , going back to your question about the process , we probably also pull in you know , you as their financial advisor and their accountant , to look at it just from a purely tax , income tax standpoint and make sure you know , see if they have any suggestions or or options to consider in setting it up .
So that would be a concern , partly because and I don't don't know if we well I think we did mention this when you create and fund the charitable remainder trust , you get an immediate tax deduction based on the remainder value that's going to go to the charity .
There's some limitations on how much of that deduction you can take each year based on your AGI , but you get the ability to you carry it forward for up to up to five years . So that's where the CPA would come in . We would kind of look at well , what's your income been historically ?
Are you going to be able to use up all of that deduction within the five years ?
And then hopping a same topic , you know different rabbit . You think about the donor advise funds . We have several podcasts we've done on donor advise funds but specifically , you don't have to be over the exclusion to participate in a donor advise fund that's for any family who wants to do that .
I think that's the beauty of donor advise funds is they're really easy to set up . You don't have to have a lot of money . You can do them with five or $10,000 . So it's a, it's an easy way to get started in that charitable area without spending a lot of money to set something up .
So that's for a really for the most part every day , every day , clients at our firm that all , all of our clients can go and fund something like that . And what I like about it is a lot of grandparents have done it and they basically assigned grandchildren . I think they realized they forgot to teach their kids to be charitable .
So they're working on that next generation , right . But around Thanksgiving time they say , hey , the funds earned X amount of dollars .
We need to find , you know , three grandkids , three , three organizations that you want to support because you're kind of making you a board member of this five unofficially of the donor advise fund , which I think is neat to see , that process . So let's talk about , let's go really big here for a minute and and let's say that we're well over the exclusion .
At what point do you just create your own family foundation ?
You know , and I was thinking about that too , that is kind of an alternative to the donor advise fund , but it does take more significant assets . I think you know if you're over the exemption and you're charitably inclined I don't know that there is a specific number , but those are more expensive to set up . You know you're forming an entity .
You got to apply for tax exempt status with the IRS . There's annual filings and maintenance related to a private foundation . So you know I'd say a million dollars are up , probably to , to even consider that probably . But the benefit is you know the donor advise fund you can involve the family , but they're not getting compensated
¶ Private Foundation and Charitable Options
. With a private foundation , it's your , it's a , it's a corporation and it has a board of directors that can be compensated and there's additional requirements, on a donor or on a private foundation , you have to make grants each year equal to 5% of the value of the assets and , like I said , there's there's even though it's not paying taxes , there's still IRS
filings that are needed every year , public and private foundations and , most of the time , 2 classifications right , and most of the time what we would be talking about would be a private foundation , that it's all the money's coming from one individual or one family to create this terrible entity .
And then the family stays involved , like I said , acting as the board and directing those , those annual grants that are made, so .
And those can live forever very , very long time . Yeah , I'm on the board up at Berry College , on the board of visitors , and I think time flies , especially as I get older , it just moves faster . But it's within the last five years .
I know that the Ford Foundation had done a lot of repair to the buildings that Mr Ford had originally built on the property , which is which is pretty cool as a maintaining his legacy , literally his vision and mark the berries vision , being able to then come back and maintain that like literally the rock on the side of the building which is , which is pretty
cool . But you don't have to have Ford kind of money necessarily to to have a private foundation .
No , I don't think you need . You know tens of millions of dollars it can be done . And theoretically it could be done with less than a million . But I just don't think you . There's a cost benefit analysis .
Yeah , as to the donor advise funds now , or just make it so easy , right , it's hard for me to believe that you wouldn't want to do that , but in a private foundation , if you wanted to give money directly to someone to go to school well , you kind of have to avoid that .
There's still limitations on that , so you can't set it up , you know , and primarily for the benefit of individual family members or things like that .
No , no , no . But if you want to start your own scholarship to something , you could just do , that right . You could have less , less criteria than you do in the donor advice fund , as long as it's not self benefiting , right .
And most , and I think you still have . So , even if you're doing stuff like that , if you're , if you're a private foundation , you still ? Got to be making grants to other charities . That's primarily what they .
They're kind of just a pass through that , you know gotcha , which is the public ones , you can give it to individual people .
Yeah , well , or there's , and we're getting into stuff that I don't know as well .
Yeah , I've been a part of a couple smaller private foundations and I know that that's something that we had to change .
And there's there's a you know , I think , a point where , like I said , a private foundation it's partly it's about where the money's coming from . A private foundation is usually created and funded by a single person .
When you get into a public charity , that's where you're doing more public fundraising and you're getting a large portion of your donations from the general public .
And then you have another one that I don't know much about , which will be a public operating foundation or , I'm sorry , a private operating foundation , where it's a private foundation but it does engage in some more of those direct charitable activities .
So ultimately there's a lot of charitable options for people even , especially over the exclusion . To keep the money out of the government's hands and put it into the hands of people who actually need it would just some take some forethought and some planning , but also maintain a little control and I guess we didn't talk too much about that .
But with the Charitable Remainder Trust , the grantor again the person setting up that trust a lot of times can act as the trustee . So they're managing those investments within the trust while they are receiving the income distributions and have a little bit more control .
You know , I guess control maybe the wrong word they can't , they don't have complete control over it , but they can still manage . How ?
it's invested .
Yeah , and they've got to make those payments every year . There's some work involved sometimes , you know . Again , with the unit trust you've got to be able to value that assets every year .
There's different options for hard to value assets where you can do a net income crut , where if you're putting in something that's , you know , illiquid and I guess the classic example would be valuable works of art or a business or something like that where you set it up , where the payout is based on the net income generated .
So in those , initially until that asset is sold , there's very little coming out on distributions and then when it's sold , you kind of make up for the for the misdistributions and just keep going from there , Right .
There's other variations where it can flip from a net income type situation to a typical crut upon the charitable remainder trust upon the occurrence of some event . So yeah , there's and that's the kind of thing that as part of the process we can sit down and talk about what's going to work best .
Is it going to be a straight charitable remainder and duty trust or a straight charitable remainder unit trust ? Yeah , are we going to do one of those other options ? And a lot of that would depend on what's the asset they're looking at to fund this vehicle .
Thank you , we can sit here and talk for probably hours on all different kinds of top legal topics . Let's , let's , let's wrap it here , Sean . If people want to work with you , how do they contact you ?
You can get to me my my direct office phone number is 770-795-5077 , or email sgshelton@ mijscom .
Thank you for your hard work and certainly your loyalty to Wiser clients . So I think we've had one single complaint .
It's my pleasure . I'm glad to hear that hope it stays that way . Five stars . We'll do our best . Yeah , thanks for having me . Thanks for having fun .
Thanks for being on here . You know we have a couple episodes . If you want to learn more about state planning Episode 120, 'Finding the right estate planning attorney for you' , Episode 116, 'Are you striving to leave a purposeful legacy ? ' . We also have our YouTube channel called A Wiser Retirement .
What is the role of a trustee and to prevent family conflict in legacy planning ? These are all in the show notes . You can direct link there . Thanks for listening to this today's episode . If you're interested in learning more about Wiser Wealth Management , and want to schedule a consultation, meet with one of our fiduciary financial advisors .
You can do so by going to wiserinvestor . com or you can click on the link in the in the episode notes . Thank you , guys . See you next week . Thank you .
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