Thelma Smith, age 70 and retired, had a problem: her expenses exceeded income, and the gap was widening each year. Her primary investment was $1 million worth of agricultural property that her husband had left her 20-years ago. While this netted her $25,000 a year from a lease agreement with a local farmer, that number was not providing enough income. In this hot real estate market, Thelma considered selling the property to a willing buyer, but she did not relish the idea of paying Uncle Sam over $100,000 in capital gains taxes.

  Thelma finally decided she needed some professional advice on what to do and discussed her cash flow situation with her financial advisor. Upon doing his review, the advisor noticed on Thelma's tax return that she was giving a considerable amount of money every year to a local charity. He asked whether she was willing to decrease the amount of her annual donation to the charity in order to increase her income. The client was emphatic that she would not reduce this expense and the advisor would have to find another way to increase her income. In fact, not only did she not want to decrease the donation, she actually wanted to make larger gifts in the future. With this in mind, Thelma's advisor contacted the local charity's planned-giving officer and together they worked out a plan for Thelma.

  The plan was fairly straightforward. Thelma would transfer the farmland to a charitable remainder trust (CRT). Once the property was in the trust, the trustee would then sell the land. Because this type of trust is designed for the benefit of a charity, Thelma would avoid paying the capital gains tax on the sale of the property. With the proceeds from the sale of the property, her advisor would reinvest the money in income-producing assets such as bonds and bond mutual funds, allowing the trust to pay Thelma $60,000 a year for the rest of her life. Part of the income would be taxable as income, and the balance would be a tax-free return of principal. To reduce the tax burden further, Thelma would recieve a charitable tax deduction for a portion of the donation. Finally when Thelma dies, the money left in the CRT will pass directly to the charity, providing it with a lump sum of money for it to use as it seems fit.

  Thelma liked the CRT concept because of the tax savings and incresed income; however she did not want to give her largest asset to charity at the expense of leaving nothing to her children. To address this concern, Thelma's advisor suggested an irrevocable wealth replacement trust. The trustee would buy a $1 million life insurance policy on Thelma's life to replace the funds that would go to the nonprofit organization. Thelma could pay for the policy with income from her CRT and the immediate tax saving that she would receive from her donation. In addition, as long she takes advantage of the annual $11,000 per person gift-tax exemption to fund the wealth replacement trust, her heirs will receive the $1 million estate tax free.

  This technique works well because it 1) reduces both capital gains taxes, and potentially, estate taxes, 2) potentially increases current income and, 3) benefits worthy charities. Remember, though, that one size does not fit all in financial planning and that this is only one way to achieve a client's financial planning goals.

  If you would like a free illustration on how a CRT and life insurance may possibly increase your income, reduce income and estate taxes, and help your favorite charity, please call our offices at (310) 268-7860, email us at info@brimhallassociates.com to set up a no-cost initial consultation.