Income Makeover

Thelma Smith, age 70 and retired, had a problem: expenses exceeded income, and the gap was widening each year.

Her primary investment was $1 million worth of agriculture property that her husband had left her 20 years ago. This netted her $25,000 a year from a lease agreement with a local farmer. Thelma thought about selling the property, but she did not like the idea of paying over $100,000 in capital gains taxes.

Thelma discussed her cash flow situation with her financial advisor. The advisor noticed on Thelma's tax return that she was giving a considerable amount of money to a charity and asked whether she was willing to decrease this expenditure. The client was clear that she would not reduce this expense. In fact, she wanted to make larger gifts in the future.

Thelma's advisor and the charity's planned giving officer worked out a plan for Thelma. Thelma could transfer the farmland to a charitable remainder trust (CRT). The trustee would sell the land without paying the capital gains tax and reinvestment the proceeds in income-producing assets such as bonds and bond mutual funds. The trust would then pay Thelma $60,000 per year for the rest of her life. Part of the income would be taxable, and the balance would be a tax-free return of principal. When Thelma dies, money left in the CRT will pass to the charity.

Thelma liked the CRT concept because of the tax saving and increased income. However, she did not want to give her largest asset to charity at the expense of leaving nothing to her children. To address this concern, Thelma's advisor suggested an irrevocable wealth replacement trust. The trustee would buy a $1million life insurance policy on Thelma's life to replace the funds that would go to the nonprofit organization. Thelma could pay for the policy with income from her CRT and the immediate tax saving that she would receive from her donation. In addition, as long as she takes advantage of the annual $11,000 per person gift-tax exemption to fund the wealth replacement trust, her heirs will receive the $1 million, estate tax free.

If you would like a free illustration on how a CRT and life insurance may possibly increase your income, reduce income and estate taxes, and help your favorite charity, I'd be happy to help.

If you would like to meet either in person or by telephone (or simply want to receive a copy of my "Income Planning Guide"), please use the CONTACT US link and let me know.

I look forward to meeting you!