The Best Financial Planning Tool

(1)



5/7/2014 (c) - 2014 CPC Holdings, LLC

The Best Financial Planning Tool

The Charitable Remainder Trust

Presentation by

Emanuel J. Kallina, II, J.D., LL.M

Kallina & Associates, LLC

100 West Road, Suite 202

Towson, MD 21204

410-377-2170

Society of Financial Service Professionals,

Baltimore Chapter

(2)

The Question

Would you like to increase your

assets under management, and sell

replacement life insurance policies?

(3)

Our Thinking



In the 1990’s:



_{Charitable Remainder Trusts (CRTs) were very popular}



Insurance companies “double-dipped” (managed assets

and sold replacement life insurance policies)



_Today:



Currently $100 billion in CRTs



History shows there will be another resurgence

Would you like to participate?

(4)

Goals



_{End goals:}



Gain more assets under management



Sell insurance policies



_{Serve a wider range of clients, including “near-millionaires”}



Help clients to achieve their financial and philanthropic goals



_{Promote charity}



Today’s goal is to convince you that:

The CRT is the best financial planning

tool available.

(5)



Part 1 – The Best Financial Planning Tool

The Charitable Remainder Trust

(6)

Part 1 – Overview

1. Charitable Remainder Trusts

(CRTs)

2. The CRT & Insurance

3. History repeating itself



Income tax rates are up



Asset values are up



# of CRTs will increase

4. The math



Annual contributions



One-time contribution

6. The client’s perspective



Unknowledgeable advisors



Involuntary vs. voluntary

giving

7. Considerations



Alternatives



Overcoming unfounded

concerns

(7)



Charitable Remainder Trusts

Part 1 – The Best Financial Planning Tool

(8)

Charitable Remainder Trusts (CRTs)



Codified in the Tax Reform Act of 1969



_{CRT is a tax-exempt vehicle, and assets can grow tax free}



CRT pays income to one or more beneficiaries, typically

husband and wife, until death



At death of the survivor, remainder goes to charity



2 types:

1. C

haritable

R

emainder

U

ni

T

rust (

CRUT

)

more popular

(9)



Insurance & the CRT

Part 1 – The Best Financial Planning Tool

(10)

The CRT & Insurance

Problem: What happens if

Mom and Dad die the day after

they sign their CRT?

All of the assets go to charity

and

the

heirs get nothing.

(11)

The CRT & Insurance

Solution:

An Asset Replacement Trust

The CRT creates a

need

for life insurance.

(12)

The CRT & Insurance

End Result:

There are 2 sources of revenue.

1. Money under management from CRT itself

2. Replacement life insurance policy

(13)



History Repeating Itself

Part 1 – The Best Financial Planning Tool

(14)

History Repeating Itself

Point #1: Income tax rates are high & will go higher

Point #2: Asset values are up

Point #3: In a similar environment in the 1990’s, CRTs were

(15)

Point #1: Income Tax Rates are High

Federal Only

2012

2013

% Change

Ordinary Income Tax

35.0%

44.6%

27%

Capital Gains Tax

15.0%

25.0%

67%

Federal & California

2012

2013

% Change

Ordinary Income Tax

43.6%

52.0%

19%

(16)

Point #1: Income Tax Rates will Go Higher



_{Proposed higher income taxes on wealthy}



Most “wealthy” individuals are only “wealthy” for a one

(17)

Point #2: Asset Values are Up

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

$18,000

(18)

Point #2: Asset Values are Up

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

1/3/1995

1/3/1996

1/3/1997

1/3/1998

1/3/1999

1/3/2000

DJIA Values 1995 to 2000

(19)

Point #2: Asset Values are Up

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

$18,000

3/2/2009

3/2/2010

3/2/2011

3/2/2012

3/2/2013

3/2/2014

(20)

Point #3: In a Similar Environment…

0 20,000

40,000

60,000

80,000

100,000

120,000

Number

of

R

et

ur

ns

(

in

Exi

st

enc

e)

Total CRUTs By Year & Asset Size

Total Returns

Under $500K

$500K to $1M

$1M to $3M

$3M to $10M

>$10M

(21)

Point #3: In a Similar Environment…

0 10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000

1999

2000

2001

2002

Number

of

R

et

ur

ns

(

in

Exi

st

enc

e)

Total CRUTs 1999-2002 By Asset Size

Total Returns

Under $500K

$500K to $1M

$1M to $3M

$3M to $10M

>$10M

Linear (Total Returns)

Upward trend line

from 1999 to 2002

(22)

Point #3: In a Similar Environment…

0 20,000

40,000

60,000

80,000

100,000

120,000

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Number

of

R

et

ur

ns

(

in

Exi

st

enc

e)

Total CRUTs 2003-2012 By Asset Size

Total Returns

Under $500K

$500K to $1M

$1M to $3M

$3M to $10M

>$10M

Linear (Total Returns)

Constant trend line

from 2003 to 2012

(23)

Point #3: In a Similar Environment…

0 20,000

40,000

60,000

80,000

100,000

120,000

2005 2006 2007 2008 2009 2010 2011 2012

Number

of

R

et

ur

ns

(

in

Exi

st

enc

e)

Total CRUTs 2005-2012 By Asset Size

Total Returns

Under $500K

$500K to $1M

$1M to $3M

$3M to $10M

>$10M

Linear (Total Returns)

Downward trend line

from 2005 to 2012

(24)

Point #3: In a Similar Environment…

Year

Total # of

Returns

Under

$500k

$500k to

$1 mil

$1 mil to

$3 mil

$3 mil to

$10 mil

$10+ mil

% Change

in Total #

1999

64,923

41,425

15,930

4,381

2,555

632 ---2000

78,239

47,003

21,467

5,682

3,270

816 20.5%

2001

84,201

56,888

13,906

9,922

2,808

676 7.6%

2002

89,874

61,732

14,463

10,011

2,895

773 6.7%

2003

91,371

63,880

14,782

9,311

2,737

661 1.7%

2004

93,329

65,869

14,763

9,361

2,647

689 2.1%

2005

94,779

66,517

15,070

9,781

2,698

713 1.6%

2006

94,767

66,187

15,116

9,974

2,743

746 0.0%

2007

95,567

65,371

15,806

10,631

2,956

802 0.8%

2008

96,248

64,776

16,100

11,317

3,191

864 0.7%

2009

95,928

66,548

15,294

10,378

2,916

792 -0.3%

2010

93,831

66,555

14,431

9,458

2,672

715 -2.2%

2011

93,828

67,211

13,897

9,366

2,642

713 0.0%

2012

91,250

65,444

13,587

9,012

2,532

675 -2.7%

(25)

History Repeating Itself

Point #1: Income tax rates are high & will go higher

Point #2: Asset values are up

Point #3: In a similar environment in the 1990’s, CRTs were

highly popular

(26)



The Math

(27)

Annual Contributions – Assumptions

CRUT

Side Fund Investment

Common Assumptions



Donor ages 41, 41



25 annual contributions $10,000



Adjusted basis of gift $1,000



Retirement age 65



Age at death 85



Investment return

◦

Ordinary income 20%

◦

Capital gains 80%



State tax rate 8%



Stated amount 5%



Investment return 8%

(28)

Annual Contributions – Results

CRUT

Investment of Appreciated Asset



IRR

6.62%



Remainder to charity

$972,950



IRR

5.57%

Investment of Cash

(29)

Annual Contributions – Cash Flow

-$10,000

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

$90,000

Ca

sh

Fl

ow

(Aft

er

Tax)

Age

(30)

One-Time Contribution – Assumptions

CRUT

Side Fund Investment

Common Assumptions



Donor ages 41, 41



Contribution $1,000,000



Adjusted basis of gift $100,000



Retirement age 65



Age at death 85



Investment return

◦

Ordinary income 20%

◦

Capital gains 80%



State tax rate 8%



Stated amount 5%



Investment return 8%

(31)

One-Time Contribution – Results



IRR

6.83%



Remainder to charity

$7,458,148



IRR

5.50%

CRUT

Investment of Appreciated Asset

Investment of Cash

(32)

One-Time Contribution – Cash Flow

-$1,000,000

-$850,000

-$700,000

-$550,000

-$400,000

-$250,000

-$100,000

$50,000

$200,000

$350,000

$500,000

Ca

sh

Fl

ow

(Aft

er

Tax)

Age

(33)

One-Time Contribution – Cash Flow

$0

$1,000,000

$2,000,000

$3,000,000

$4,000,000

$5,000,000

$6,000,000

$7,000,000

$8,000,000

$9,000,000

$10,000,000

Cash Flow To Donor

Net to Heirs

Gift to Charity

(34)

Based upon the math …

The CRT is the BEST financial

planning tool.

(35)



The Client’s Perspective

Part 1 – The Best Financial Planning Tool

(36)

The Client’s Perspective



_{Clients are philanthropists:}



Involuntary philanthropists $ to the government



Voluntary philanthropists $ to charity



Historically, and certainly currently, clients would rather

(37)

The Client’s Perspective

“Most advisors lack the tools and/or comfort levels to link

technical counsel to more personal, values-based

philanthropy planning …. If their advisors are not

knowledgeable about philanthropic planning, donors seek

referral to others who can.”

“Doing Well by Doing Good”,

a 2000 study by The Philanthropic Initiative, Inc.

(38)

The Client’s Perspective

Clients are going to give.

What role will you play?

(39)



Considerations

Part 1 – The Best Financial Planning Tool

(40)

Alternatives



_{There are no other viable options}



Tax shelters are gone



No other way to obtain large income tax deductions

(41)

Overcoming Unfounded Concerns

Problems

1. Loss of control of principal

1. Inability to invade CRT for

charity’s benefit

1. Inability to borrow on

monies in CRT

Solutions

1. CRTs can be terminated,

with the donors/income

beneficiaries getting back

up to 90% of the then FMV

of CRT

2. A portion of a CRT can be

carved out, and given to

charity, and a charitable

deduction obtained

3. Loans on income flow?!

(42)

Summary

The CRT is the BEST financial

planning tool available.

(43)



Part 2 – More about the CRT

Now that you care …

(44)

Part 2 – Overview

1. More reasons to create a CRT

2. Types of CRTs

3. CRT Requirements



Generally



Investments



Payouts

4. Fiduciary income

5. The underlying math

6. When to create a CRT

(45)



More Reasons to Create a CRT

Part 2 – More about the CRT

(46)

More Reasons to Create a CRT

Desire to:

1. Have a “personal IRA”

2. Control investments

3. Share in a Bull Market

4. Diversify

5. Avoid ordinary income or capital gains (e.g., developer)

6. Hedge against financial disasters (“Rainy Day Trust”

TM

)

7. Control income depending on needs

(47)



Types of CRTs

Part 2 – More about the CRT

(48)

CRTs

Charitable Remainder

Unitrust (CRUT)

% of FMV each year

Charitable Remainder

Annuity Trust (CRAT)

fixed $ amount

(c) - 2014 CPC Holdings, LLC Emanuel J. Kallina, II

_5/7/2014

Standard CRUT (SCRUT)

principal & income

Income Only CRUT (IOCRUT)

income

Flip CRUT

Net Income with Make-up CRUT (NIMCRUT)

(49)

Example #1

_5/7/2014

Income

Principal

IOU

SCRUT

5

2

0 IOCRUT

5

0

0 NIMCRUT

5

0

2 Common Assumptions



Amount $100



Payout 7%



Dividend $5

(50)

Examples #2 – NIMCRUT



_{$5 appreciation earned}



_{no dividends, interest, etc.}

Land

Zero Coupon Bonds

Microsoft

Growth Stock

VA

ULP

Life Insurance

SMLLC

No Cash

(51)

Single Member LLC

_5/7/2014

NIMCRUT

Donor

Buyer

Single

Member LLC

100% of all Units

Cash

Appreciated Assets

Income Interest

Appreciated Assets

Step #1

Step #2

Step #3

(52)



Fiduciary Income

(53)

Fiduciary Income

_5/7/2014



_Maryland



_Indiana



_Delaware

(54)

Fiduciary Income



_{Total Return}



_{Post Gift Appreciation}



_{Inventory Value}



_{Tax Terms don’t use!}

(55)



CRT Requirements

Part 2 – More about the CRT

(56)

CRT Requirements – Generally

_5/7/2014

1. A fixed percent or amount (between 5% and 50% of net

FMV)

2. Valued annually (or initially, with a CRAT)

3. Distributed to a beneficiary (1 or more charities)

4. For a term of years (< 20), or 1 or more lives

5. With irrevocable remainder to 1 or more charities

6. CRAT or CRUT, but not a combination

(57)

CRT Requirements – Payouts

_5/7/2014

1. Timing – “reasonable period of time after end of the

taxable year” (e.g., April 15

th

₎

2. Must be a fixed percentage or fraction (CRUT) or dollar

(58)

CRT Requirements – Investments

_5/7/2014

1. “Annual realization of a reasonable amount of income or

gain from the sale of assets” = Trustee must not prevent

2. Commingling ok – SEC No Action (6/24/1986)

3. Charity can borrow or use assets of a CRT as collateral

(59)



The Underlying Math

Part 2 – More about the CRT

(60)

What are the Mathematics

Underlying a CRT?

(61)

The Underlying Math

FMV of $100

_5/7/2014

Ex.

Assumptions

Present

Value

PV of Remainder

Interest

1 $10 / yr for 5 yrs @ 8%

$43

$100 - $43 = $57

2 $10 / yr for 10 yrs @ 8%

$72

$100 - $72 = $28

3 $12 / yr for 10 yrs @ 8%

$87

$100 - $87 = $13

4 $12 / yr for 10 yrs @ 6%

$94

$100 - $94 = $6

(62)



When to Create a CRT

(63)



_{Sale of a Business}



_{S Stock and C Stock}



_{LLC and Partnership}



_{Mergers and acquisitions}



_{Sale of Assets of a Business}



_{Farm equipment}



_{Real Estate}

11/13/2013

(64)



_{Sale of Real Estate}



_{Apartment building}



_{Commercial Property}



_{Selling real estate on which accelerated}

depreciation has been taken



_Farm



_{Second home or vacation home}

(65)



_{Liquidating one asset to reinvest in}

another asset producing a higher rate

of return



_{CD exchanged for Gift Annuity}



_{Equity rich portfolio producing 2%}

swapped for CRUT payout at 6%



_{Incentive Stock Options}

11/13/2013

(66)



_{Avoiding Huge Ordinary Income Taxes}



_{Hitting the lottery (dinar “ship comes in”)}



_IRAs



_{Disposing of assets that are no longer}

necessary



_{Life insurance policy}



_{Coin collection}



_{Guitar in attic}

(67)



Planning for retirement



Exchanging highly appreciated equity for fixed income

return of a CRAT



_{Exchanging highly appreciated securities for fixed}

income investments



Paying for Long Term Care



Delaying income until retirement years (e.g., FLP

CRUT, Spigot Trust)



The “Rainy Day” Trust – Spigot Trusts

11/13/2013

(68)



_{Diversifying highly appreciated assets}



_{QDP from ESOP into different assets}



_{Paying Down Debt}



_{Sale of business and part of stock in}

company used to pay down old debt

(69)



_{Estate Planning}



Transfer estate tax dollars to charity rather than

government



_{Discount planning using a CLAT}



_{Paying IRA to CRT to benefit heirs and spread out}

taxes



Making gifts to a brother



_{Making gifts to a friend}



_{Zero estate planning using a CLAT}

11/13/2013

(70)



_{Corporate Tax Planning}



S

tripping cash from the business at a low cost

through redemptions



_{Family Law Planning}



_{Using a CRT to fund divorce obligations}



Creating a special needs trust for a child



_{Planning for a noncitizen spouse}

(71)



_{Avoiding Income and Estate Taxes}



_{Super CLAT}



_{CLAT as an income averaging tool}



_{Seeing Charitable Gifts Benefit Others}

During Lifetime



_{Funding Charitable Pledges}



_{Using a CLT}

11/13/2013

(72)



_{Business Succession Planning}



_{Transferring corporate stock to children,}

through a DAF



Transferring business to employees



_{Redemptions to pass business along to}

next generation

(73)

Succession Planning

If the CRT works for your client

when he sells his business,

why wouldn’t it work for you?