FINANCE: Charitable Trusts Can Yield Dual Benefits

Joe Davis, J.C. Bradford & Co.

Just because waste management executives earn their net worth in intangibles like collection and hauling, doesn't mean they have to suffer from low liquidity. By setting up a charitable remainder trust (CRT), waste executives can retain interest and create liquidity within their net worth, according to an investment professional.

In a CRT, assets are put in a trust fund for a charity to receive after a specified period of time or upon the donor's death. Over the duration of a CRT, the interest on the assets goes to the individual. Once the CRT expires or the individual dies, the charity receives the remaining assets.

CRTs are a way for executives to increase the dividend stream from their stock. They may do this because the dividend stream is too low to support them or their company has a zero-cost basis, where the firm is worth much more than the amount originally invested.

One option is simply to sell some stock, but the taxes may deplete up to one-third of the value and lower the dividend. In contrast, a CRT is tax deductible. The deduction amount varies widely depending on the income stream.

Because a CRT removes assets from an estate, it reportedly eliminates any inheritance and estate tax on the deposited assets. Executives can replenish their estate for their heirs through wealth replacement trusts, insurance strategies that work in conjunction with the trust. The most common form of wealth replacement is a life insurance contract.

CRTs have dual advantages. On one hand, CRTs benefit a good cause - an executive's favorite charity. On the other hand, the CRT also offers shareholders an escape from what seems like a certain and unavoidable tax trap, said Matt Bullard, an attorney with Wyrick, Robbins, Yates & Ponton, Raleigh, N.C. It permits liquidation of the stock without liability for taxes on the gains and allows almost all of the sale proceeds to be reinvested in assets that create a larger stream of current income.

Some waste executives may find it difficult to part with some of their stock. To avoid this, consider CRTs as a way to let someone else participate in a company that has been good to its owner.

Also, CRTs are here to stay. The rules governing CRTs have remained virtually untouched for more than 20 years and Congress is unlikely to do away with a system that encourages gifts to charities.