Happy entrepreneur drinking coffee working in office

Background:

Mr. Thompson, a 65-year-old entrepreneur, approached our firm looking for efficient ways to manage his wealth, support a charitable cause he is passionate about, and ensure a secure financial future for his heirs.

Challenge:

Mr. Thompson wanted to support a charity close to his heart and to ensure he had a reliable income during his lifetime. He was also concerned about the sizable estate taxes due upon his death.

Solution:

Our approach began with our Discovery Meeting and creating a comprehensive Financial Plan. In the process of our analysis, we discovered he had a sizable portion of his wealth in a concentrated stock position with a very low-cost basis resulting in a very large unrealized capital gain. To help accomplish all his goals, we worked with his estate planning attorney and his CPA and recommended the following:

  • Charitable Remainder Unitrust (CRUT): A CRUT solves several of Mr. Thompson’s planning issues. First it allows for the contribution of low-cost basis stock. Not only will he get a sizable charitable tax deduction but it will also allow for the diversification us his investments while inside the CRUT without any tax consequences. Additionally, the CRUT provides a steady stream of income throughout his lifetime. Upon his passing, the remaining assets in the CRUT will go to his charity.
  • Irrevocable Life Insurance Trust (ILIT): Mr. Thompson still had a significant estate even after the contribution into the CRUT. Consequently, we recommended the creation of an ILIT which will hold a new life insurance policy. The amount of the life insurance corresponds to the potential estate tax liability that will be due upon his passing. Since the ILIT is considered separate from his estate, the insurance proceeds are not subject to estate taxes. Upon Mr. Thompson’s passing, his heirs can use the tax-free proceeds from the policy to cover the estate tax obligations. And because he did not need all the income from the CRUT to cover his living expenses, he used a portion of this income (net of taxes) to pay the life insurance premium.

Benefits:

  • Tax Efficiency: The CRUT provided immediate tax benefits through the charitable deduction and reduced the size of Mr. Thompson's taxable estate. The ILIT strategy ensured his heirs received the necessary funds to pay estate taxes without any tax implications.
  • Guaranteed Income: With the CRUT, Mr. Thompson secured a fixed percentage of income based on the trust's annual value, safeguarding his financial well-being during retirement.
  • Legacy Planning: Through the ILIT, Mr. Thompson ensured that his heirs would not be burdened with significant estate taxes, preserving his legacy.
  • Philanthropic Impact: Mr. Thompson achieved his goal of supporting a cause dear to him, knowing that the charity would receive a significant contribution from the CRUT upon his passing.

Conclusion:

By tailoring financial strategies to Mr. Thompson's unique needs and aspirations, our firm demonstrated its commitment to comprehensive, personalized, and effective wealth management. Our solutions not only maximized the benefits for our client and his family but also contributed to a greater societal good.