There’s no question that charitable remainder trusts (CRTs) are an excellent way to contribute to a charity, but what if I told you that you could bring the wonderful, unselfish, philanthropic, tax-deductible, risk-managed, income-producing strategy of a CRT to an even higher level.
By combining a CRT with long-term care (LTC) insurance (purchased with a portion of the income generated by the CRT), the donor will further protect her assets (versus self-funding the total cost of her care) and provide all the elements of dignity associated with the care she so desires.
Typical Client Situation
Many estate planning attorneys, certified public accountants and financial advisors have very successful, independent-thinking, high-net-worth and charitably minded clients whom they advise. Some of these individuals are, or at one time were, corporate executives who were granted large, concentrated positions of low cost-basis stock, and some are individuals who’ve invested very wisely and successfully over their lives. Others may have acquired low cost-basis stock as gifts, inheritances or otherwise.
Often, these large positions remain undiversified or are at risk and pay very low dividends, in some cases only 1.5 percent, 1 percent or even nothing at all (for example, Amazon.com).
Many of these charitably minded individuals also haven’t properly planned to generate a steady stream of income in their retirement years to fund their desired lifestyles, nor have they planned for the funding of the care they so desire and deserve in their later years.
To illustrate this point, here’s a story about Lady Arlene, a 64-year-old retired model and actress living in the Murray Hill section of Manhattan, and David, a seasoned, 35-year veteran financial advisor with a trust, estate and portfolio management background and a passion to help clients and their families reach their highest financial potential in the most tax-advantaged way.
A Diversified Portfolio
The story goes like this…
Lady Arlene’s accountant referred her to David in 1988 after her husband died unexpectedly. Arlene, being a recent widow and not the decision maker on financially related issues during her marriage, needed someone to advise her. At the onset of their advisor-client relationship, David prudently diversified Arlene’s inherited assets into a diversified portfolio of high-quality equities and municipal bonds in a conservative/balanced allocation.
Purchase of Amazon Stock
In 1997, David recommended Amazon.com as one of the companies he thought had economic merit because the public was just starting to embrace online shopping, and he thought the trend would become popular in the future. David invested in 2,500 shares at $20 per share for a total of $50,000 in Amazon.com for Arlene right after its initial public offering. From a relatively modest beginning, which included a rocky period during the dot.com crash, the online retail giant has seen its stock skyrocket. In the process, the stock split in rapid succession, once in 1998 and twice in 1999. Arlene’s initial 2,500 shares grew to a whopping 30,000 shares by the end of 1999. This growth in shares through stock splits, coupled with Amazon’s unstoppable rise in value as more and more shoppers embraced online shopping, caused Arlene’s initial investment of $50,000 to reach a total of $20.25 million by the end of 2015!
A Change in Priorities
In early 2016, Arlene and David met once again for dinner, which had become a normal occurrence over the years to address financial planning and estate planning issues. Arlene’s current situation needed particular attention. Arlene was 64 now; she wanted to continue to live in Midtown Manhattan, which she loved for its unlimited nightlife and theater, arts, culture and all the wonderful things New York City had to offer. She also wanted to continue to live independently and to “travel the world.” Mostly, she wanted to increase her philanthropic giving to the arts, the sciences, her church and to the disadvantaged and underprovided orphanages around the world.
Arlene was single and had no children. Her relatives were a brother, who lived in Los Angeles, and two nieces and a nephew, who lived in other states. Although Arlene was quite generous to them over the years, providing them with annual monetary gifts and fully funding family vacations each year, they rarely visited her.
After fully understanding Arlene’s individual situation, David suggested it would be in her best interests to meet with her estate attorney Jim, her CPA Jane and himself to completely reevaluate her estate, tax and financial situation once again.
The meeting was set the following week in Jim’s conference room.
At the meeting, Arlene restated her personal situation. David added that Arlene’s net worth had grown tremendously through her holdings of Amazon and that based on current values, her individual assets were now valued at $21 million, most of which was concentrated in Amazon stock, which paid no dividend. He went on to say that he and Arlene had budgeted approximately $25,000 per month to provide for her lifestyle needs and wants, as well as to travel the world and to continue to provide annual gifts to her family and to charity.
Arlene added that she was also concerned about the future, especially her later years when she would require hands-on care. She wanted to continue to live in her Manhattan co-op for as long as she could. She wanted to remain independent, make her decisions herself and not rely on her brother and other family members. She went on to say how she had a very good friend named Elsie who was 15 years younger than she, with whom she traveled, who was a licensed practical nurse, and Arlene wanted Elsie to be her companion and aide when she needed the care. Arlene mentioned that Elsie had agreed to assist her because Elsie enjoyed her company. Finally, Arlene mentioned that if there ever came a time when she couldn’t stay at home, she wanted Elsie to be her companion, and she wanted her care to be provided by one of the finest nursing homes in New York, which charged approximately $700 a day.
Arlene also expressed other concerns that afternoon: (1) She didn’t have the cash flow to fund all her wishes because Amazon paid no dividends; (2) Most of her assets were in one holding (Amazon), and there were days that Amazon stock declined; (3) Her potential tax liability if she sold the stock to fund her lifestyle, the eventual estate taxes her estate would have to pay and most importantly the fact that her heirs, her brother, nieces and nephew wouldn’t have the financial knowledge or wherewithal to someday manage this wealth.
After Jim, Jane and David completely evaluated Arlene’s situation, they recommended the following solutions, which Arlene agreed to implement:
- Jim redrafted all of Arlene’s estate documents, which included a CRT and four charitable remainder annuity trusts (CRATs) created under Arlene’s revocable inter-vivos living trust, one for her brother and one for her two nieces and nephew.
- Raymond James Trust (RJT), a boutique trust company, was chosen as corporate trustee for the CRT and for the four CRATs, and Arlene and RJT both hired David to manage this portion of her assets.
- The CRT was funded with half her Amazon position for a total of 15,000 shares equaling $10.125 million.
- David sold the Amazon position (without tax) in the CRT and invested the proceeds in a conservatively balanced portfolio of utilities and consumer non-cyclical companies with a municipal bond fixed-income component to provide a partially tax sheltered income of 4 percent, equaling a total of $405,000 in annual income for Arlene.
- Jane was retained to handle the tax returns of the trust and continued to handle Arlene’s tax returns, which included a very large charitable deduction related to Arlene’s contribution to the CRT.
- David continued to manage the non-CRT portion of Arlene’s assets mostly in Amazon stock, working closely with Jane to take full advantage of the charitable deduction created by the CRT. David implemented a protective covered call option writing strategy to generate additional income for Arlene, as well as provide downside protection on the remaining Amazon shares held in Arlene’s name individually. Protective put options were also purchased to protect the downside risk in the Amazon stock position in Arlene’s name.
- David brought in Brian, an LTC insurance specialist, to evaluate Arlene’s LTC wishes. After carefully understanding them, Brian provided her with a policy that would pay a $350 daily benefit, grow with inflation and be effective immediately when Arlene’s care was needed. It would allow for home health care provided by Elsie and nursing home care at Arlene’s favorite place in New York City. This would allow Arlene to receive the care she desired: the ability to live her final years independently without the added burden on her family and with dignity. It would also provide the economic benefit of not relying wholly on self–funding her future care at one of the finest-quality, highest-cost nursing homes in New York City.
- In the future, Arlene’s estate will have minimal to zero estate tax due to the CRATs created for her younger brother, two nieces and her nephew set up under her living trust.
- The CRATs will provide a fixed income for life for her brother, nieces and nephew and be professionally managed by David and RJT.
- Arlene will be able to travel the world throughout her later retirement years and continue to live in New York City without any financial burden and with complete individual and financial independence she so desires.
- Most of all, Arlene will rest assured that all the things she truly believed in and made her who she is today, the arts and the sciences, will be endowed by her in the future. Furthermore, her strong faith and desire to help the underprivileged and orphans of the world will be accomplished.
I’ve found that the best result for clients come when professional advisors collaborate together. Therefore, I always recommend that clients meet with their estate attorney, financial advisor, CPA and insurance specialist to find specific answers for specific situations as we did for Arlene.