Do you have clients who have built a successful business, who are considering retirement and are quite upset at the "diminishing effect" taxes will have on their future lifestyle? 
 
The Facts: After years of hard work building their business, Vi and Tom are planning for their retirement. After an initial meeting with their advisors to discuss a potential sale of the business, they are very discouraged. They are beginning to wonder how they will ever achieve their economic and family goals with so few after-tax dollars.

They own 100% of their $5,000,000 business (a C corporation). Their basis for tax purposes is near zero, so a sale to a third party will trigger approximately $1,000,000 of capital gains tax.

They would like to have a plan that offers:

- An immediate income tax deduction
- Reduction of estate taxes
- The ability to limit or avoid capital gains tax
- Retirement income
- A meaningful gift for charity
- An inheritance for their children

The Solution: A charitable remainder trust may be a viable solution. 

A charitable remainder trust (CRT) is an irrevocable trust where income is paid to trust beneficiaries for a term of years or for life, with a remaining assets going to charity. Since a CRT is a tax-exempt entity the trust is not subject to tax. So if the CRT sells the stock, no capital gains tax will be paid; leaving a larger sum for re-investment and payout to trust beneficiaries. In addition, the donor(s) receive a charitable deduction when the asset is transferred to the trust. 

Vi and Tom can gift their low basis stock to a special form of CRT, called a NIMCRUT, naming themselves as income beneficiaries and their church as the remainder charity. An expert appraisal will be required to establish accurate values that can be substantiated if the Service should question the transaction. 

The gift of stock to the CRT generates an immediate charitable income tax deduction equaled to the present value of the charity's remainder interest. The amount that can be deducted for income tax purposes depends upon the application of percentage rules that relate to the tax payers "contribution base." Vi and Tom have timed the transaction will, as they planned to work for five more years and will use the current allowable deduction and any carryovers to offset income taxes on their salaries.

Vi and Tom have chosen a third party trustee for the CRT. This gives evidence of independence to the transaction and helps to avoid a challenge that there is a step transaction with a prearranged sale. Vi and Tom are confident a buyer for the stock will appear before they retire. 

At retirement, Vi and Tom will begin to receive annual payments, payable as long as either is alive. Since their interest is a life annuity, at their deaths there will be no estate inclusion. Their goal of reducing or eliminating estate taxes is met. In addition, their church receives a legacy. 

However, there is a price for avoiding capital gains and estate taxes on the business - the CRT assets ultimately pass to a charity and not to their children.

The Role of Life Insurance: Some or all of the tax savings and increased cash flow gained by the use of a CRT can be used to purchase insurance in an irrevocable trust for the children's benefit. The ILIT is typically referred to as a wealth replacement trust because the life insurance in the trust is structured to help replace the value of the asset gifted to the charity. Properly drafted, designed and funded, the death benefits will pass estate and income tax-free (under IRC 101(a)).

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