Law News and Tips
A CLIENT LETTER
Fred L. Vilbig © 2018
Let me commend you on what you are doing. Having helped my wife care for her parents as their health and mental capacity declined, I know how physically, intellectually, and emotionally draining this can all be. Growing up, we never really think about the kinds of things you have to deal with now. Some people walk away. Some people delegate the duties. Some people just want to end it all. But you are caring for your mother at what is probably the most difficult time in her life, and also of your life up to now. As I said at the beginning, I commend you.
That said, I wanted to answer some of your questions. The first was whether having your mom declared incompetent created any problems for you personally. To answer that, I need to define what I mean by declaring your mom incompetent.
If she had not done any planning, that would mean getting a court involved. It’s not the end of the world, but it is sort of a pain. You’d need to get a doctor to answer a formal set of questions (“interrogatories”) to say that your mom can’t perform certain basic functions of daily living. For instance, can she remember to take her medicine at the proper time? Does she know to wear a coat when it’s cold outside?
Once you have the interrogatories, you have a hearing. Assuming all goes as planned, the judge would then put you in charge of her finances (a conservatorship) and her person (a guardianship). You would next need to get a court order authorizing you to spend money, and then you have to file an annual financial report with the court.
Fortunately, your mom did all the necessary planning. She has a general durable power of attorney, a medical directive (which includes a medical power of attorney and a living will), and a trust. Although people can put others in charge of things even while they’re competent, your mom (as most people) wanted to retain control as long as she could. So in her case, in order for you to take over, you just need a doctor to certify that she is not able to perform some of the necessary basic functions of daily living.
Just as a caution to you, although getting that kind of certification from a doctor used to be fairly easy, I have noticed in recent years that doctors have become more cautious. They are often reluctant to make that certification. However, given the right circumstances, they will.
Once you do get the certification, you can pay your mom’s bills and make decisions regarding her care. There is no need for any court proceeding. I know you were worried about having to testify, so I’m assuming that is a relief.
I now want to return to your main question about liability. The doctor’s certification does not impose any additional personal liability on you. You are basically already doing what needs to be done. With the certification, you will just have the proper authority to do it. And you can do everything with your mother’s assets, not yours. You will have no additional personal financial liability for your mom.
Once again, I want to commend you on what you are doing. Even though it can be very challenging, it is the right thing to do. Our parents took care of us when we were young, and now it’s our turn. Life is funny that way.
Let me know if you have any more questions.
Fred L Vilbig
Fred L. Vilbig © 2018
One of my sons texted me the other day. He needs money. Not the way you’re thinking. He’s getting into the real estate business – multifamily units. He was renting an apartment but got tired of that, so he bought a 4-family, lives in one unit, and rents the other three. I wish I would’ve been that smart.
He’s going into business with one of his grade school buddies to buy more properties. But they want to get bigger properties. The problem is that that requires more money than the two of them have.
That seems to be a perennial problem for businesses – money. It happens all the time where a business needs to buy more equipment or expand facilities in order to grow and make more money. But the question is how.
Owners can borrow money, but banks can be stingy. They don’t like lending money when there’s a chance they won’t get it back. It has to be a pretty certain business opportunity for them to lend a bunch of money. Just to make sure, they will usually put some kind of a lien against the assets, and they’ll impose a bunch of financial covenants or promises on the business. Those covenants can be kind of a pain, but it is their money that they are lending you.
Instead of a bank loan, business owners can go to friends and family to get private loans. Those can get messy. It’s important to have a clear understanding about what’s going on. If things go well, your “lender” will want to treat it as an investment so that they get to share in the growth of the business. If things go badly, your “investor” will want to be treated as a lender so they can get paid back before the shareholders. And the understanding needs to be in writing – people are funny about remembering things the way they want to.
My son knew that he wanted to sell interests in the business. He also knew that this would raise securities law issues. He thought that meant he had to register with the federal Securities and Exchange Commission. That is a horrendous effort, so you try to avoid it at all costs… that is, short of prison. So small business owners need to fit into a federal exemption.
Generally, small (under $5 million with less than 35 investors) or purely intrastate security sales are exempted, though the devil is in the details. If you have investors in more than one state, you’ll probably need to file a Reg. D registration which is a simplified (although not simple) process. But even if you have all of your investors in one state (and intrastate offering), you may still be subject to that state’s securities law, so you need to look for a state exemption. In Missouri, you’re pretty safe if you have fewer than 25 investors.
But even if you’re exempt from state registration, you probably still are subject to the disclosure requirements. If you’re offering securities to people who will not be directly involved in the business, you cannot make a material misstatement (that is, tell a lie) and you cannot fail to disclose some material information about the business. And again, this kind of disclosure needs to be in writing because of that memory issue I mentioned earlier.
If you’re thinking about raising money to expand your business, give us a call. It’s important to everyone to get it right.
THE GREAT TRANSITION
Fred L. Vilbig © 2018
As I’ve said before, everyone is predicting that over the next decade or so, we are going to see the largest business transition in history. The aging baby boomers are either voluntarily or involuntarily going to pass their businesses on to the younger generation. It is important to plan. As I mentioned in my last column, my grandfather (God bless him) didn’t.
Although early in this process we thought that mom and dad would be giving their businesses to their kids, it looks like that is not the case. Many of the business owners put little away for retirement. Their businesses are their retirement savings. They can’t put that in jeopardy.
But why not sell the business to the kids? Many times the kids aren’t interested. Other times, the kids wouldn’t be a good fit for one reason or another. Quite often, the kids can’t get a loan, even an SBA loan, or they don’t want to personally guarantee a loan, putting everything they own at risk. What we are seeing more and more is sales to insiders or sales to outside third-parties. We recently closed on the sale of an asphalt company for these very reasons.
When we represent a buyer, we always suggest that the transaction be structured as a purchase of the company assets. The reason for that is that the buyer doesn’t want the seller’s liabilities. For instance, in preparation for the sale, the seller may have recently fired some employees without getting adequate releases. Or maybe there are pending income or employment tax issues. Maybe they’re unsatisfied liens. A buyer doesn’t want any of that baggage, so they buy the assets but leave the liabilities.
The problem is that liabilities can be pesky-particularly in product liability and environmental cases. The courts have decided that if you are buying an entire business and plan to continue it (even using the old name), then the buyer should be liable for some, if not all, of those liabilities. It’s very annoying.
That’s where “due diligence” comes in. In a well written purchase agreement, the seller will give the buyer lots of warranties and representations regarding all kinds of things. It would be nice if we could trust people, but we can’t. As President Reagan once said, “Trust, but verify.” That is due diligence.
For the buyer, due diligence takes many forms depending on the particular assets. If there is real estate, you’ll want title insurance. If you are buying things (like equipment or vehicles), you need to make sure there are no liens for loans. You’ll want to make sure there are no tax liens or outstanding judgments. And you’ll want the seller’s lawyer to certify the existence and authority of the seller. Buyers may not want to take the time or pay the money to do these investigations, but you ignore them at your peril. It’s sad when a buyer thinks he or she has purchased a golden nugget only to find out that they have iron pyrite (that is, fool’s gold).
So if you are in the market to buy your own business, caveat emptor, that is “Buyer beware.” The old saying applies: an ounce of prevention is worth a pound of cure. Sometimes that cure can be terribly expensive.
Call if you have any questions.
THE FAMILY BUSINESS
Fred L. Vilbig (c) 2018
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My great-great-grandfather came from Bavaria in 1860. After some conflicts between his farming and the Missouri River, he moved in about
1876 to Dallas where there wasn’t as much water. He found that pecan trees grew in sandy soil, so he bought some land with pecan trees. He dug up the
sand and gravel and took it into town. Dallas at the time was a growing city with lots of building, so they needed lots of sand and gravel. The streets
of downtown Dallas have a layer of asphalt over cobblestone that was laid on Vilbig Brothers sand and gravel. Our roots are deep.
The family business survived to the third-generation. That’s kind of remarkable. Most family businesses don’t survive the second generation. It even survived a family feud.
Over time the business changed. They were good at digging up sand and gravel, so they moved into excavation work digging basements for many of the major buildings in downtown Dallas. From there they moved into building dams and doing the dirt-work for roads. When I was a teenager, I drove dump trucks, bulldozers, and scrapers. I wasn’t very good at all that, so I went to law school.
When my grandfather died in 1976, my brother wanted to take over the business. He had a civil engineering degree and had worked in the company for a few years. The problem was that there was no plan in place. I know my grandfather had an attorney (Bill Burrows) he worked with a lot. He’d often complained that Bill was making him do something. But evidently no succession plan was in place.
My grandmother survived my grandfather. Although I remember my grandfather as being successful (although he never did get us that pony he always promised us), I know it wasn’t always easy. My grandmother would remind us that in business, “Some years you eat the chicken, and some years you eat the feathers.”
I don’t know if my grandmother ever really liked the construction company. After my grandfather died, instead of working something out with my brother, she decided to just sell the equipment and close the business. She told my brother he should start from scratch just like my grandfather did. That wasn’t true. After the family feud, my great-grandfather bought to surplus WWI Army dump trucks to restart the business, and that’s what my grandfather had when he got started.
The problem with my grandmother’s strategy was that she wasted perhaps the most valuable company asset. Sure the dump trucks, bulldozers, and scrapers were worth something, but they were all used and beat up. The biggest asset of the company was the name and the 100 years of goodwill in the community. She got nothing for that. It just evaporated.
I don’t know why my grandfather didn’t have a succession plan or why my grandmother just liquidated a 100-year-old family business. I’ll never know. It’s just sad.
If you have a family business, you need to give some thought to what happens if you become incompetent or die. Is there a child involved? If not, are there key employees who could buy the business? There needs to be some sort of a plan. Otherwise, a lot of hard work and good will can just evaporate. And like I said, that’s just sad.
Let’s get together if you want to talk about your options.
RESOLUTIONS AND TAXES
Every year when the New Year rolls around, we all talk about making resolutions. We make resolutions to improve our appearance and physical health. We make resolutions to become better people. We make resolutions to improve our finances. I saw one study that says that people achieve less than 10% of their New Year’s resolutions. I wonder if it’s even that high.
I would like to propose a resolution for the New Year (I know this will be published in late January, but we had the new tax law to deal with). I want people to resolve to update their estate plans, and the new tax law provides an incentive. Here’s why.
The federal estate tax exemption used to be $600,000. With homes and life insurance and retirement benefits, a lot of people got caught by this tax. We wrote a lot of estate plans with tax planning included, which was the right thing to do at the time.
A typical plan for a married couple involved two separate trusts. We used two trusts to make administration simpler on the death of the first spouse to die. The trusts were generally equal in value. Every year or so we wanted to look at the assets in the separate trusts to make sure they were still generally equal, and the clients were supposed to periodically rebalance the trusts by shifting assets from one to the other where possible.
On the death of the first spouse to die, the assets in his or her trust would be distributed first to a tax-sheltered trust up to the amount of the exemption. The trustee of that trust (typically the surviving spouse) was required to distribute all of the income to the beneficiary. The surviving spouse was almost always entitled annually to demand a distribution of 5% of the trust for no reason at all. In addition, the trustee could use the principal for the health, education, maintenance, and support of the spouse in the trustee’s discretion. The amounts in the tax-sheltered trust would avoid estate taxes even on the death of the second of the spouses to die, provided that the trust was properly administered. Clients generally felt that these restrictions were reasonable enough to avoid estate taxes. Any amounts in excess of the exemption would be distributable to a marital trust that could be subject to estate taxes on the death of the second spouse to die.
The problem with this plan is that the tax-sheltered trust was an irrevocable trust. Irrevocable trusts are taxable. They have to file tax returns. Failure to file the return can result in penalties and interest. And these trusts can generate taxes on trapped capital gains. Taxes on trust income are particularly bad because although the rates are comparable to individual rates, they kick in very quickly. For instance, any trust income over $11,950 will be taxed at 39.6%.
With the new tax law, the exemption amount is around $11 million. A married couple can avoid taxes on approximately $22 million. It is estimated that only two in every 100,000 people will be subject to federal estate tax. What that means is that for most married couples, an estate plan with tax planning is not only unnecessary, but it can also end up costing money.
Another problem with these old plans is that the separate assets of spouses can be liable for the debts of the individual spouse.Jointly held marital assets are protected from the claims of the creditors of either individual spouse. In 2011, the Missouri legislature passed a law allowing joint, marital trusts to be protected from the claims of individual spouses as well. Separate trusts could be liable for the debts of an individual spouse.
I would like to propose a resolution with couples with old estate plans: update your plan. Don’t leave the surviving spouse with a headache.When one of you dies, it probably is not a good time to deal with this sort of thing.
It’s the right thing to do. I’ll wait for your call.
LLCs AND TAXES
When I first started practicing law, we formed a lot of corporations.That was because corporations offered limited liability, and generally partnerships would not.The problem with a corporation, though, is that they are taxable entities (exclusive of S-corporations); they have to file annual reports with the state; and they have to have annual director and shareholder meetings (which, of course, most small businesses don’t do).It was kind of a pain.
In order to at least reduce the tax burden on small businesses, Congress (followed by the states) allowed smaller corporations to be taxed as partnerships under Subchapter S, the S-corporation.There wasn’t a corporate tax, but the paperwork remained.
In 1977, the State of Wyoming (of all places) did something very unusual. Their legislature came up with a new form of business entity that had limited liability like a corporation but otherwise acted like a partnership: no paperwork; no required meetings; and no company level taxation.The limited liability company was born!The idea caught on big time. When Hawaii adopted a similar law in 1996, all 50 states had some form of LLC law.Company profits generally flow through the business to the LLC members according to their percentage interest.
Now it is pretty rare for us to see incorporated small businesses.Almost all small businesses are now formed as LLCs.In order to form an LLC, you first need to file Articles of Organization. The problem is that a lot of people just stop there.As I’ve written about before, the law requires an operating agreement.It doesn’t say what has to be in the operating agreement, but just that you must have one. A single member LLC operating agreement can be very basic. A multi-member LLC operating agreement is going to be more complex.
Under current law, a single member LLC doesn’t even have to file a separate tax return.Instead, the company income just flows through to Schedule C of the owner’s Form 1040.With multi-member LLCs, they have to file a partnership tax return (a Form 1065)( unless they opt to be taxed as an S-corporation, in which case they file a Form 1120-S), and each member’s share of the profits and losses are reported on a Schedule K-1 and flow through to the individual owner’s return.
The new tax law, the Tax Cuts and Jobs Act, includes a new deduction for LLC owners (actually it’s for any non-corporate business owner).Basically it’s a 20% deduction for “qualified business income,” subject to numerous calculations, including wage limitations.To me, along with the reduction in the corporate income tax, this seems the heart of the jobs and pro-business purpose of the new law.The problem is that the devil is in the details.It will be interesting to see how this plays out for small business owners.The limitations are designed to cut down on abuses, but there are a lot of wily characters out there.We’ll have to see how things work out.
In any event, this new deduction should help small business owners, and given the competitive world we live in, they can use all of the help they can get.
The first consultation is free. Or call him now at (314) 241-3963
We finally have the much ballyhooed and vilified 2017 tax act, the “Tax Cuts and Jobs Act” (the “2017 Act”) – don’t you just love these names. The 2017 Act changes a lot of fairly obscure provisions of the tax code that will affect a relatively small number of people, but some of the changes will impact a lot of people. How they affect individual taxpayers will have to be seen. It should be noted that a number of provisions under the old law have not been repealed, but they have only been suspended through 2025. This is probably due to budgetary requirements.
For purposes of this post, I want to provide a very brief summary of some of the provisions that I think will affect the most people. I can assure you that much more will be written on it in the future.
New Income Tax Rates and Brackets: The 2017 Act reduces most of the tax rates for individuals by 2 or 3 %. The 2017 Act also creates new tax brackets for trusts and estates. Under the old law, trust and estate rates were the same as those for individuals, but they were telescoped down so that you hit the maximum tax rate at about $12,500. This will change.
Increase in the Standard Deduction: Under current law, the standard deduction for 2018 would have been $13,000 for married couples; $9,550 for heads-of-households; and $6,500 for individuals who were either single or married but filing separately. Under the 2017 Act, the standard deduction is increased to $24,000 for married couples; $18,000 for heads-of-households; and $12,000 for individuals who are single or are married but filing separately. That’s the good news.
Personal Exemptions Suspended: Now for the bad news. In exchange for the increase in the standard deduction amounts, the deduction for personal exemptions is reduced to zero until 2026. It appears that these two changes in conjunction with one another mean that prior non-itemizers may come out ahead while prior itemizers may come up short.
New Inflation Adjustment Factor: Beginning in 2018, several inflation adjusted amounts will use a “chained” consumer price index (“CPI”) formula. Reportedly the chained CPI grows faster than the unchained rate. This is an obscure point, but it might work in the favor of taxpayers.
Kiddie Tax: Since this applies to kids up to 18 (or 22 if full-time students), this is probably a bad name. Perhaps a better name would be “dependent’s tax.” However, the 2017 Act changes the tax charged on a child’s income. Earned income will be taxed at single individual rates. Net unearned income (interest, dividends, rent, and royalties) will be taxed according to the new brackets for trusts and estates.
Capital Gains: The 2017 Act retains the present provisions on capital gains, but the breakpoints will be indexed for inflation using the new chained CPI.
A number of deduction provisions are also modified under the 2017 Act.
State and Local Tax Deductions: Non-business payments for state and local property taxes and income taxes are deductible, but only up to $10,000. This will be a bitter pill to swallow for residents of high income tax states.
Mortgage and Home Equity Loan Interest Deductions: The deduction for interest paid on home equity loans is suspended through 2025. For mortgages created after December 15, 2017, the deduction or mortgage interest is limited to interest paid on mortgages up to $750,000 for married couples (down from $1,000,000), and $375,000 (down from $500,000) for married taxpayers filing separately. This new lower limit does not apply to pre-December 15, 2017, mortgages, but it would apply to any refinancing of old mortgages.
Charitable Contribution Rules: The limitation on the deduction for cash contributions to public charities (generally schools and universities, churches, museums, etc.) is increased from 50% of the donor’s AGI to 60% of his or her AGI. There is no increase in the deductibility of non-cash contributions to public charities or any contributions to what are called private foundations.
Miscellaneous Itemized Deductions: Under current law, a taxpayer can deduct certain expenses (such as the cost of preparing tax returns) to the extent that they exceeded 2% of the taxpayer’s AGI. This deduction has been suspended through 2025.
Individual Mandate: The individual mandate under the Affordable Care Act which imposed a penalty for not maintaining a mandated health insurance policy has been repealed.
Alternative Minimum Tax: The tax code imposes an additional tax on certain “tax preference” items and on excess children. Income is exempt up to a certain amount. For taxpayers who are hit by this tax, the 2017 Act almost doubles the exemption.
529 Accounts: Under current law, 529 plans could be used to pay for qualified higher education expenses. Under the 2017 Act, these plans can be used for tuition at elementary and secondary public, private, or religious schools, and even for certain home school expenses, up to a $10,000 annual maximum.
Estate and Gift Taxes: The 2017 Act doubles the estate tax exemption amount, indexed for inflation. It is expected that the 2018 exemption amount will be $11.2 million ($22.4 million for married couples). I’ll write more on that in the future. This increase also increases the generation skipping tax exclusion amount.
Qualified Business Deduction: The 2017 Act added a new deduction for non-corporate taxpayers engaged in a business activity other than certain service businesses, including law and accounting. The deduction is allowed for S-corporation shareholders. The math is complicated, but it’s basically connected to a business’ W-2 wages. In promoting the 2017 Act, the Republicans said that it would promote the creation of jobs. It seems that this deduction does that, but time will tell.
There has been a lot of spin put on the 2017 Act by both the left and the right. Time will tell how it plays out nationally, but to see how it will affect your taxes personally, you will probably need to see your tax advisor.
As I am writing this, Thanksgiving is around the corner. It is my wife's favorite holiday. Christmas has shopping. Easter has eggs. The 4th of July has fireworks, and possibly a trip to urgent care. But Thanksgiving is just about family getting together for a really good meal.
But sometimes the holidays can be a discovery for us. If we live far away from our parents, we don't see them on a day-to-day basis. On the phone they sound fine. They tell you all about what relatives and old family friends are up to. They talk about their latest doctors' appointments and what ills them. And they ask a lot of questions about you and your family. Everything sounds great, but sometimes it isn't.
No one really wants to admit to getting old. It’s a one-way street. When you're young, you heal and adjust. When you're older, there's only covering up.
So the holidays are a good time to check up on mom and dad. One of the very visible signs that things are not going well is if there is a mountain of mail on the dining room table. If so, then you can rest assured that the bills are not getting paid. Check the refrigerator.
If there is only milk in it, then there is a good chance that mom and dad are only eating cereal. I know the commercials tell us that cereal is a part of a complete breakfast, but the important word there is "part". It is only a part of breakfast, and breakfast is only one of a person’s daily meals. Cereal does not satisfy all your basic nutritional requirements no matter what mom and dad might tell you.
And look in their closets. Do they have weather appropriate clothing hanging where they can easily get to it, or does mom have out that cute little sun dress she really loves?
I'll warn you that if you look like you're snooping around when you are visiting, you might get a very heated reaction ... especially if they are trying to hide something.
So when you visit your parents for the holidays, you might want to nonchalantly:
(1) check the mail,
(2) check the refrigerator, and
(3) check the closets.
It might feel like prying, but it's important.
And while you’re at it, you might want to bring up the subject of powers of attorney, both financial and medical. At some point, someone will probably need to step in and take care of them. That can be a little scary, so you might want to wait until after dinner (and the wine) is settling in to bring up the subject. If you need horror stories to lead into the conversation, then maybe you can look at some of my old blog posts. Ignoring the issue is not a good thing to do. It only leads to trouble.
They say that making sausage isn’t pretty. I like sausage, but I’ve never made it, and I probably don’t want to know much about it. With all the government
regulation of food now, this probably isn’t as bad as it once was. However, when families used to process their own meat, they were very efficient.
Everything was used. As the saying goes, the only thing they didn’t use was the moo. And all the spare parts went into the sausage. You probably just
don’t want to know.
I look at politics much the same way. Having served on my city government, I can say it was ugly and frustrating to say the least.
To understand what’s going on, it’s probably good to keep the process in mind. Bear with me while we return to Civics 101 with an ugly dose of reality.
All revenue legislation is supposed to start in the House of Representatives. It starts in the House Budget Committee. This is where the special interest pressure starts, at least in Congress. There is public debate. Amendments are voted up or down. Then the bill is voted on according to party lines basically without regard to the merits of the bill.
If approved by the committee, the bill is then sent to the full House. Moderate horse-trading ensues, and amendments are proposed. Noble sounding speeches are made, but only for the benefit of the constituents at home. Some amendments pass while some are voted down. If the party in control likes the bill, it passes the House and is sent to the Senate.
The Senate will refer it to their Ways and Means Committee. More horse-trading ensues. Nice speeches are made. Amendments are voted up or down. Some version of the bill makes it out of that committee and goes before the Senate. Again if the party in control likes the bill, it gets approved.
The problem is the versions of the bills approved by the Senate and the House are never the same. The two versions then have to go to a Conference Committee to “reconcile” the two bills. Amendments can be inserted at that time too after all public debate is over. It’s here were some of the most controversial provisions are added, such as the HHS Mandate and the Johnson Amendments. Do you hear the meat grinder going?
What emerges from the Conference Committee many times bears striking differences from what went in. And the House and Senate then have to vote the reconciled bill straight up or straight down, without any further amendments.
In my mind the problem with this process is that you and I have no real input into what comes out of the Conference Committee. Special interest groups and very powerful constituents put pressure on the committee members. Individual congressmen propose amendments that favor one of their particular constituents. If his or her vote is needed for passage, that provision passes. Sometimes you’ll see tax code provisions that referred to a business located on a lake that operates a sandwich shop between the hours of ten and five in the state of Alabama. The name of the particular beneficiary of that law is not mentioned, but it was written so narrowly that it could only apply to one organization. But nice speeches were made.
The tax bill being proposed at best has only slim margins for passage. Concessions to individual congressmen will be necessary to get the votes they need. It will be interesting to see what special interest provisions end up in it. I guess this is all part of the democratic process, but it sure seems like sausage making to me. Is that any way to run our government?
You’ve heard the expression, “It’s better to be lucky than to be good?” Well, John was lucky. He was good too, but the lucky part was the biggest thing. But being a religious guy, he knew that luck had nothing to do with it. More on that later.
John was in advertising. He’d worked hard. Over time he had moved up in his company, and they had made him a partner. Not a big partner, but still a partner. That was the hard work part.
His firm had a good reputation, and when an advertising firm from London was looking for a St. Louis partner, they found John’s firm. They made John and John’s partners an offer they really couldn’t refuse. After taxes, John netted $5 million in the company shares. That was the lucky part.
Now for the religious part: he knew this was a gift. He knew that nothing just happens by chance, so the question was, what should he do with this gift? He couldn’t just give it away since he and his wife needed the income for retirement. He also had a pretty big tax liability he was facing, so he needed to do some planning.
He was working with a financial planner at the time. After talking this through, the planner recommended that John and his wife set up a charitable remainder unitrust, a CRUT. A CRUT allows a donor to make an irrevocable gift of a remainder interest while retaining the right to receive annual payments of a percentage of the value of the CRUT principal. Since there is an irrevocable gift involved, John and his wife were entitled to a charitable contribution deduction for a portion (though not all) of the value of the assets transferred to the CRUT. In addition, since the CRUT itself is tax exempt (unfortunately not the annual payments, though), they could at least to defer tax on the sale of his stock. Pretty nifty, eh?
When John was setting up the CRUT, he really hadn’t decided on what charities he wanted to benefit and how. I had warned him about just giving money outright to charities. I have seen congregations torn apart over money fights when they received a big gift. So we set up the CRUT, I included a provision so that he could designate the charitable beneficiaries in his will.
There a little trick to doing this. If you are making a gift to a public charity, for cash gifts, you can deduct up to 50% of your adjusted gross income (your “AGI”). If you’re giving real property, stocks, or bonds, then your deduction is limited to 30% of your AGI. However, if you are contributing to what is called a private foundation, then your deduction for cash gifts is limited to 30% of your AGI, and the deduction for non-cash gifts are limited to 20% of your AGI. There is a 5-year carry-forward for the unused charitable contribution deductions, so they’re not lost, but who wants to wait for a deduction.
If you reserve the right to name a charity in the future and say no more, then your deductions will be subject to the private foundation 30/20% limits. The trick is that the CRUT needs to provide that you can only designate qualified public charities as the beneficiaries of the CRUT. Then you contribution will be eligible for the 50/30% limits.
One last thing – John did not want to give up control. He didn’t want to be locked into a bank or a charitable foundation. He wanted to be his own trustee. So we named him and his wife as the initial co-trustees.
As you can see, CRUTs can be kind of complicated, but under the right circumstances, they are a tremendous way for charitably minded people to make a gift, get a deduction, defer taxes on capital gains, and earn tax deferred income like in an IRA.
To learn more or to analyze whether this is a good option for you, feel free to call and make an appointment. I look forward to hearing from you.