You don’t have to be Warren Buffett or Bill Gates to utilize sophisticated financial strategies to achieve your goals. Many are available to everyone; but, not everyone is aware they exist or how to use them.
There’s a way.
Consider this strategy1 used by many successful business owners to achieve goals you may share:
- Transfer a small amount of stock equally to your children by using your annual exclusion and, if necessary, part of your gift tax exemption.
- Contribute the balance of your stock to a charitable remainder trust (CRT)* – you will be the non-charitable beneficiary.
- Once the transfer is completed, the corporation makes a general offer to all shareholders to redeem the outstanding stock at a specified price. The independent trustee of the CRT agrees to sell the stock to the company at the offered price. The corporation, using loans, retained earnings, or using other strategies, purchases the stock that now becomes ‘treasury stock’.
- Your children are the only remaining stockholders in the corporation and have full control.
- The CRT now has cash instead of stock. The trustee can invest the cash in a diversified portfolio to provide a lifetime of annuity or other income to you and your spouse.
- There will be no immediate capital gain tax on the sale of the stock because it was sold by the CRT.
- After you and your spouse are deceased, the remaining funds in the CRT will pass to your family foundation or another qualified charity you chose.
- And, you’ll get a charitable tax deduction for a portion of the value of the stock you gave to the CRT.
Not bad. But, as they say, don’t try this at home. Be sure to meet with your financial, tax, and legal advisors to map out evaluate this strategy to make sure it’s right for you.
*A charitable remainder trust is an irrevocable strategy that allows a deduction for the gift to the CRT since the asses will ultimately benefit a qualified charity. The donor(s) may live off the income the assets provide and upon death, the rest goes to the charity. Life insurance is often used to replace the value of assets donated because it allows the replaced assets’ value to be more equitably divided and, properly structured, the death benefits are generally tax-free.
1I first saw this strategy outlined in GIVING, by Robert Esperti, Renno Peterson, and Lemuel Bargeron in an Esperti Peterson Institute book published by Quantum Press, LLC, 2003.
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Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California. He is also licensed for insurance as an independent agent under California license 0C00742. IFG helps specializes in crafting wealth design strategies around life goals by using a proven planning process coupled with a cost-conscious objective and non-conflicted risk management philosophy.
The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.