Patton Thorne is a fictional Wealthpreneur with a real-world problem. In 1997, he invested $10,000 in the initial public offering (IPO) of a little-known company named after a South American river. On a split-adjusted basis, his Amazon shares are now worth approximately $25 million. (As of summer 2024, Amazon stock traded at an all time high of $200 per share).
Although his Amazon shares have appreciated significantly in value, Patton is concerned about his wealth concentration in a single public market security. The stock price has experienced recent turbulence, climbing to a high of $175 in the summer of 2021 and falling to a low of $86 per share in early 2023. Patton is thrilled that it rebounded to its recent all-time high! However, the stock’s recent 12% price decline has him wondering if it might be time to reduce his holdings.
As he considers selling his Amazon shares, Patton remembers the 23.8% tax he would incur on the gain from selling his shares. As his tax advisor explained, he would be subject to a 20% long term capital gain tax plus the 3.8% net investment income tax (NIIT) enacted in 2010 during the Obama administration. Patton is not in the mood to write a $6 million check for the politicians on Capitol Hill to spend!
Wealthpreneur Lesson
Warren Buffett’s Philosophy On Synergy
“I am a better investor because I am a businessman, and a better businessman because I am an investor.”
Spread the love
Nicole Thorne is Patton’s daughter and the CEO of several of the family businesses. She suggests that Patton consider a large donation to the local Children’s Hospital system that treated her many years ago. Patton likes this idea, but he is unsure how to execute it without owing millions in taxes.
Patton needs to address his concentrated wealth position. At the same time, he would like to learn about tax-advantaged charitable contributions. If he was my client, I would recommended he consider a Substantial Sale Charitable Remainder Trust.
The perfect solution
Many successful Wealthpreneurs own highly appreciated property such as family-owned businesses, real estate, and publicly traded securities. These Wealthpreneursoften want to tax efficiently monetize their holdings while supporting charitable organizations. For owners of privately-held businesses, trying to sell at the top of the economic cycle can be an additional consideration.
In this scenario, I often recommend one of my favorite tax strategies: the Substantial Sale Charitable Remainder Trust (SSCRT). This diagram shows how the SSCRT strategy works.
We all scream for CRTs!
A charitable remainder trust (CRT) is a tax strategy that provides donors with periodic cash flow and income tax benefits. When you transfer assets into a CRT, you receive an immediate charitable contribution deduction for income tax purposes. This deduction is equal to the present value of the remainder interest, which will eventually go to charity. Especially when you contribute highly appreciated assets, this deduction can be substantial.
When assets in a CRT are sold, you can defer capital gains taxes. Instead of selling your assets outright, you can contribute appreciated assets to the trust and eliminate the immediate capital gains tax that you would otherwise incur. Alternatively, the trust can sell the assets tax-free and reinvest the proceeds in a diversified portfolio. This positions the trust to generate income, which can be distributed to you (or other named beneficiaries) for a specified term or for life. You now have a reliable future income stream!
Tailored to fit
CRTs can distribute income in a variety of ways. For example, you can choose between a fixed annuity payment (Charitable Remainder Annuity Trust [CRAT]) or a variable payment based on a percentage of the trust’s assets (Charitable Remainder Unitrust [CRUT]). This flexibility allows you to tailor the trust to meet your financial needs and philanthropic goals.
When the dust settles
After the specified term has ended or the income beneficiaries have died, the remaining assets in a CRT are transferred to your chosen charity. This allows you to support the causes you care about and shrink your taxable estate, which reduces your estate tax liability. A CRT can be particularly advantageous as part of a comprehensive wealth transfer plan. With a CRT, you can achieve your charitable objectives while providing for yourself and your heirs.
You can trust these trusts
Tax advisors often think of CRTs as “black-letter law”, an established component of the Internal Revenue Code (IRC). This means the outcome of utilizing a CRT is largely certain, provided you follow the rules. If you transfer assets to a CRT, you won’t have to spend sleepless nights worrying about an IRS audit examination with a potentially staggering tax assessment! However, because these trusts are so flexible, it is important to properly apply the CRT IRC provisions.
