Unfortunately,
there are still financial services companies pitching charitable trusts like
loaves of bread, commodities sold to consumers who depend on their advisors for
objective financial advice. Until
advisors move from a commodity selling mentality to a values based, client-oriented
consulting practice where all of the financial and estate planning tools are
used in an integrated process, they run the chance of offering limited choices and
potential harm to their clients. Add to
that mixture the competing multi-disciplinary planning team approach pushed by
law and accounting firms offering financial products and services, the
traditional insurance and brokerage community may soon be on the outside
looking in. While there is nothing wrong
with an insurance agent selling a risk management product like an insurance
policy or deferred annuity, not all estate planning clients need those
products. This necessitates a change in
business practices, because avoiding clients with a desire to establish a
charitable estate plan simply because neither a life insurance
policy nor annuity sale will occur is extremely short sighted. Worse yet, brokers border on the unethical
when they steer clients away from advisors who can implement other necessary aspects
of a plan simply because they will not generate commissionable sales.
What avoidable problems are
charitable trust planners experiencing today?
Too many disgruntled trust creators were lead to believe their trust
investments would continue to outperform the market. With the prolonged bear market in recent
years, trust makers have learned that CRUT income beneficiaries may actually
receive declining payments instead of optimistically forecast increasing
payouts. Too high payouts that eroded
the value of the trust’s principal; and with less
money at work, the trust may not recover enough financial strength to be useful
over the income beneficiary’s life expectancy.
While the 10% remainder rule introduced in 1997 precluded a life payout
CRT for young donors, historically low §7520 rates may further derail many
annuity trusts (CRAT) and gift annuities (CGA). These and many other errors created by
over-enthusiastic product sellers have cast an unappealing light on legitimate
charitable planning, which otherwise offers truly motivated clients a great
opportunity to create tax efficient philanthropy.
Many advisors have been to marketing seminars and were
issued financial “hammers”, and everything begins to
look like nails. Unfortunately, quite a
few insurance and mutual fund companies consistently promote the CRT, not for
its philanthropic purposes, but to sell wealth replacement life insurance and
as a way to take illiquid assets and swap them for proprietary
investments. With the recent bear
market, many of these product-oriented charitable trust sales have come back to
haunt their promoters when they turned out to be short-term solutions to a
marketing problem and created a lot of unhappy clients in the meantime.
In pitching the advantages of
a CRT, many advisors stress capital gains avoidance. In reality, it is only capital gains
deferral, and that depends as much on the replacement investments held by the
CRT as to those that were initially placed in
trust. Unfortunately, tax efficiency
inside a CRT is not widely understood or even appreciated as an important
factor of client satisfaction. Improperly
managed, the CRT becomes an ordinary income pump instead of a more tax efficient
means to distribute realized capital gains in an orderly way. If clients are not
under some pressure to liquidate an entire portfolio of appreciated assets via the CRT, maybe they would be better off selling
a few shares every year for income, and paying the temporarily reduced tax on
those annual conversions. Thanks to
JGTRRA 2003, capital gains tax liabilities make number crunching even more important
since the lower 15% capital gain rate coupled with the new 15% dividend rate
has changed the dynamics. If the client
is primarily motivated to save tax, and not motivated by altruism, then why
bother with a CRT? Advisors who remain
focused on the client’s needs will stay out of trouble and will gain more
referrals from happy clients in the future.
© 2003 -- Vaughn W. Henry
Gift
and Estate Planning Resources
217.529.1958
-- 217.529.1959 fax
VWHenry@aol.com
On
the web at gift-estate.com
