Almost nothing beats a charitable remainder unitrust and wealth replacement life insurance trust combination for escaping capital gains, estate and income tax liabilities. The CRT and WRT are wonderful tools of the trade in the planned giving arena, but if you use jargon when discussing planned giving concepts, most clients will give a blank stare and nod occasionally until they hear you stop talking.
Planners, agents and advisors need to put these ideas into a framework that clients can understand and that will entice them to take the next step in an admittedly lengthy decision-making process. Given sufficient incentive, they will stay with you on the journey long enough to make informed decisions on potentially very big ticket items.
A win-win outcome
An excellent way of framing what is at stake and why high net worth clients should consider planned giving is to find out what community or social institutions they value and illustrate how you can help them plan for a “win-win” outcome in which their values are furthered with money that would otherwise be spent by strangers (i.e. the federal and state governments) in some other way.
Charitable intent is a key component in that clients must have some charitable or non-profit institutions they want to benefit. There must be a philanthropic itch that needs scratching in order to provide a sense of fulfillment from the detailed planning that will be required. If this motive is lacking, no amount of wonderful tax incentives will move the client forward because control and insecurity issues will take precedence in the client’s mind.
To find out whether your client has charitable intent, ask a hypothetical question (or series of questions), such as: “What would you do with $100,000 that you couldn’t spend or leave to your family?” Many times, such questions will provoke thoughtful answers about scholarship endowments, cancer research, the local church and so on. Without pressing, ask why they would give to these causes and take notes.
After establishing the desire and the financial ability to give, the next step is telling the “social capital” story to put into context the decision to plan or not plan regarding income and estate tax liabilities. As lawyers often say to people who are thinking about drafting a will or trust, “This is your plan for your money, and there is the state’s plan. You get to decide which you prefer.”
Social capital–defined narrowly here as personal wealth used to advance social causes and that otherwise would be paid to the government as income or estate tax–allows clients to harness their power to benefit their communities and to better their personal financial lives. Contrast this concept with personal economic capital, which is what we earn, spend and (if fortunate) leave to our heirs in our estates. Personal economic capital is generally treated as post-tax money, and in traditional financial planning we focus on maximizing our inflow and retention of this personal economic capital.
Since many taxes are largely avoidable, advisors can help clients redirect their social capital to benefit their local communities in ways that clients think are appropriate. By helping clients employ charitable planning tools such as current gifts, after-death gifts or gifts in trust, like the CRUT, we can direct social capital as clients intend. They, not the government, can decide which organizations and causes their money supports. After all, the planned gifts leverage money that clients couldn’t spend on themselves or leave to their children.
For example, let’s say you have affluent clients who own raw land that is highly appreciated but provides no income. At retirement, they can use planned giving tools to sell the real estate in a tax favorable manner, receive a lifetime income, and provide an eventual benefit to community organizations they like after they are gone.
The capital gains taxes on an outright sale (undirected social capital) could be minimized by putting the property into a charitable remainder unitrust, then selling the asset. The client could draw lifetime income from the CRUT, the value remaining at death going to a favorite charity or to a donor-advised fund from which the client’s children will oversee a lifetime of annual charitable gifts.
By getting your clients to understand that they have social capital and asking how they would direct it, you may find financial opportunities on many levels that would have been invisible using a traditional approach to charitable planning. There is such a thing as a win-win outcome.
Eric S. Smith, JD, CFP, is a financial planner at Lifetime Planning, Inc., Camarillo, Calif. You can e-mail him at .