When To Use A Charitable Remainder Trust – Episode 561

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[00:01] Welcome to the Prosperity Podcast. Prosperity thinkers, welcome to the podcast. Today, we’re going to be talking about charitable remainder trusts. And that may be something new that you’ve never heard of. It may be something that you’re familiar with. The reason why we’re discussing this is because the timing of it and the actual structure do matter. So Kim, you are a master at this, but this isn’t necessarily something that you do. This is something you’re able to orchestrate through others. So help us understand why Kim’s not the attorney that’s putting this together. Kim’s the one that says, hey, I’m simply the person directing and moving things around. Absolutely. And I want to start off by saying that you as an individual can do a charitable

[00:50] remainder trust for assets that are in the maybe three to four to five hundred thousand dollar range. You know, people often hear charity and they think trust and that immediately says, oh, I have to have millions. And that’s not the case. So charitable remainder trusts are a specialized section of giving a family member the ability to sell a highly appreciated asset without paying substantial capital gains taxes. So this could be a piece of real estate. It could be an individual stock. It could be any type of business whereby either you bought the asset at a very low price or the asset has been depreciated to a very low price like think real estate and you’ve depreciated it all these years.

[01:45] And if you wait until you die, you get a step up in basis. Nevertheless, a lot of people want to sell those assets before they die. And so the idea is best done in your later years. Charitable remainder trusts have actuarial calculations that get involved with them. And that means the older you are, the better. If the actuaries involved, the older you are, the better. And so I’ll walk you through the steps in their ideas around what you do with the charity and the asset and how it all happens here in a moment. But let’s just set the lay of the land and make sure we’re clear so far. Do I need to do some more introduction? No, I think that’s pretty solid. I want to just throw bullet points in there.

[02:36] So for any of our listeners that are in their prime time or a little bit older, we’ll say, and assets that does not have to be significant need to be perking up their ears and listening to this. That’s correct. Or maybe you’ve got parents or grandparents that are in their prime time years. So this is definitely 60s, 70s, 80s, 90s, highly appreciated asset desire to sell. That is the start of the fact pattern, if you will. Okay. All right. So the first thing that you want to do is look at the landscape of your family and the landscape of the charity. So the charitable remainder trust indicates that a donation is going to be gifted to the charity, and the charity is going to get the remainder

[03:32] of the asset, which stops a lot of families right there because they don’t have life insurance in place, and there are people all over this country that do charitable remainder trusts without life insurance. What I have found is that families that already own life insurance will do a charitable remainder trust much quicker. So we said that this podcast was for the older generation. Nevertheless, the better times to buy life insurance are in your 30s, 40s, 50s, and 60s when there’s no health concerns occurring as a general rule. And so this is something to learn about because you want to have some type of highly appreciated asset in your older years. I mean, that’s a goal all of us have. So acknowledging that owning life insurance will enable you to install

[04:28] all a charitable remainder trust more efficiently, more effectively in your later years, yet owning the life insurance might be better in your earlier years, and you can tie those two things together. Okay. So let’s talk about the tying of those two pieces together. So we realize there may be some that have the life insurance in place. There’s some that don’t. Let’s talk about the connection and maybe that weaving the sewing of those two together will make a little more sense for us. Sure. So you as an individual or a family have a highly appreciated asset. You want to sell it. You don’t want to pay the capital gains tax. You donate the asset to the charity, and that donation gives you a charitable deduction that you can spread out over technically six years.

[05:18] There are some nuances to that legal structure. And as stated, you’re going to have attorneys involved. Typically, an accountant needs to be involved as well. And this needs to be a public charity, not any private charity. So you donate the asset to the charity, and then the charity sells the asset. So many times you already have that end buyer in mind because the charity doesn’t want the real estate or the stock or the business. The charity sells the asset. And because the charity is selling the asset, they don’t pay capital gains tax. You as the family member or the individual that used to have the asset, as I said, you get your six years of deductions. You also get an income stream for your life and a spouse’s life.

[06:09] And now here is where the problem begins, because all of that sounds wonderful selling without paying capital gains tax income that’s guaranteed for life. It’s often a purchase of an immediate annuity that guarantees that income. So you again have an actuarial calculation again, which is why it’s later in better in your later years. The challenge then comes upon death, death of either one or both spouses, because at this point, the charity gets the remainder of that asset. And so people that have life insurance have the life insurance go to their family while the charity gets the asset. People that don’t have life insurance don’t have anything to go to their family. And because of that, this stops people from doing charitable remainder

[07:03] trusts when they might want to get that asset sold without paying capital gains tax. But they won’t do it because it disinherits their family. So when have you seen this go sideways? I’m going to play devil’s advocate for a second. Yes, it’s when the attorneys will recommend something like 10 year level term insurance on a 70 year old so that they’ll go ahead and do the charitable remainder trust. But then their family only gets an inheritance if they die within that 10 year time. And it’s actually called a wealth replacement trust. The attorneys will happily do a wealth replacement trust for you. The problem is a 70 year old 10 years. If you’re healthy, you’re going to live more like 25 or 30 years.

[07:55] And so this is why, first of all, it’s double value if you already own the life insurance. And if not, it’s more value if you look at purchasing permanent life insurance that absolutely positively is going to be there no matter how old you are when you die. So that’s one way it can get derailed is following advice to get term insurance at the time of this charitable transaction. Okay, so I’m going to call that Main Street problems because a lot of time when we go and talk with local banks or whatever things that we’re doing, they’re so focused. I mean, we’re using general terms here, but they’re so focused on the fees that they’re going to make that they forget the outcome that we’re trying to achieve.

[08:46] Yes, and that’s true of attorneys often as well. OK, so that is something that can cause it to go sideways. Can you paint a picture of where you’ve seen this work really well? And then we’re going to back into it in a couple of other parts. Absolutely. So I have a friend of a friend that lived in Florida, purchased a home when he was young, 25 or something, and he was in his early 60s, wanted to sell the home, but it had absolutely appreciated substantially. And he had and this is a primary residence, so there was no depreciation involved. He had paid off the mortgage at this point. He literally lived there over 30 years and wanted to sell this home. It was just not the right space for him to be in at all.

[09:36] And really, I think the value of the home was six hundred thousand or something. But but he paid something like 60 or 70 thousand for it. And so he enacted a charitable remainder trust. He got an attorney, found a charity, had a buyer for the home, had all the pieces and parts put together, already owned the life insurance. So he was not disinheriting his family. And this transaction saved him 25 percent of about a half a million dollars. So I think the attorney’s fees were maybe ten, fifteen thousand dollars. And he was able to then save over one hundred thousand dollars of taxes just because of this relatively simple transaction in this situation. And it was just thrilling to him because he was able to benefit a charity,

[10:29] which was something of interest to him as well. And he was able to put more money in his pocket because of the ability of the Charitable Remainder Trust to really make way more efficient the capital gains scenario on that home. OK, so that’s a real life scenario to this. What is the timing look like? So, you know, I just want to paint the picture for a novice, someone that’s not familiar of if they have a scenario where their parents or themselves are going to be in it. How long does this take to execute? And then I’m going to back out to a couple other call prequalifying questions. Sure. So I would recommend six months. I’m sure it could get done sooner, but it’s absolutely something that you want to look into as you’re starting to get serious about the sale.

[11:20] So, for example, if it’s simple like that home was, that was done in way less than six months. But if there’s a business or something that has some more complexity to it, you want to have the attorney have their time. You want to be clear on your charity. And so I recommend people go to their favorite charities and ask them if they have been involved in charitable remainder trust before, because there’s many large churches, there’s many alma maters where they actually have accountants on their staff and attorneys that have helped with charitable remainder trusts in the past. And they may have a brochure or two that can be valuable to you. So you can start to do your homework so that when the time is ready

[12:07] and the seller and the buyer are ready, the charity can step in and play the role of that middle man. And along with the attorneys and the accountants, help all that go fairly smoothly. OK, you actually answered one of my questions in your response, which was, you know, we’re going to be prequalifying the people that we’re going to work with, the professionals. Meaning, if you have insurance policies in place, you have to coordinate there. You have to coordinate with an attorney. Then you have to coordinate with the group, the charity that you’re going to be donating the assets. So in my mind, it would complicate things to be trying to do this with someone that’s never done a charitable remainder trust.

[12:51] If you have a brother in law or son in law, that’s the attorney that doesn’t do this, that might complicate it more. It’s going through and finding people that are experts at this. So what are a few of the questions that you ask that at least pass the chem test? Like, yeah, they’re they’re an expert. This is someone that we could at least have a conversation with. Well, as we have said before, thanks to Dan Sullivan and Ben Hardy’s book. It’s all about about who, not how in this instance. And so thankfully, I have contacts with attorneys that work nationwide amongst their proper organizations in terms of licensing and that kind of thing. And contacts with accountants that work nationwide with their proper licensing.

[13:40] And so I would really encourage somebody to just go for the who, not the how, reach out. I will connect you with these people. They will get in there and get it done. I don’t even know the right questions. I wouldn’t even be confident in asking enough of somebody to get clear on whether they’ve got experience in this space. I just go straight for who has done it before, who I already know and am completely confident in. Yeah, that’s solid. For any of you listeners, the email to send that request is hello at ProsperityThinkers.com. I’m actually going to rebuttal your last comment, because you actually do know the pre-qualifying questions, because by using the filter of a who, not how, and having me

[14:33] ask you those questions, meaning if you’re going with a charity and you say, hey, have you ever done a charitable remainder trust? And they go, hmm, deer in headlights. Look, that’s probably a good signal. Like this is going to make it more complicated. And if you talk with your neighbor or son-in-law, that’s the attorney. And they don’t practice in this area. That’s going to probably complicate it. And simply by avoiding those obstacles is enough to not have to know the complexities of saying in the 2024 tax law, how does this apply? That that’s an expert of question. Like that doesn’t matter to us. Well said. Yep. It is so valuable to know the who’s. Yeah, absolutely. Listeners, again, that email address is hello at ProsperityThinkers.com.

[15:23] If you have any of those questions, please send those over and Kim can connect and someone on the team can connect you with those accountants, attorneys. And there’s also content, available information, books, podcasts. We’ve shared a ton about this, so we appreciate you listening. Thank you for listening to the Prosperity podcast. To take control of your money and have it work for you, visit ProsperityThinkers.com.