Seminar selling is a great marketing tool; it’s something designed to answer questions, present the
speaker as a problem solver, motivate prospects, and generate referrals. In this particular case, an elderly couple
attended a seminar at the local senior center.
The seminar, co-hosted by a charity and three insurance agents, pushed
charitable remainder trusts (CRT) by stressing how real estate makes for a
problematic inheritance (e.g., estate and/or capital gains tax, liquidity,
management concerns, etc.) In rapidly
growing states like
Speaker
#1 met with elderly clients later and told them a CRT was the perfect tool for
them. Although their estate was valued
at $1,200,000 and taxes shouldn’t have been an issue, he
scared them with tales of high estate taxes and lack of liquidity. They agreed to do a CRT benefiting the
co-sponsoring charity and the charity’s development officer met with them. Speaker #1 sold life insurance to fund a “Wealth
Replacement Trust” or Irrevocable Life Insurance Trust (ILIT). Speakers #2 and #3 handled the reinvestment
of the real estate sales proceeds. Speaker
#3 is married to the charity’s representative, but this isn’t
disclosed.
Speaker #1 brought in his attorney, arranged for insurance coverage,
and while insurance is often useful, these clients are high-risk and
uninsurable, resulting in a $40,000 premium instead of the projected $10,000. Further complicating the planning, the rental
properties used to fund the CRT had mortgages, and debt encumbered charitable
trusts are tax bombs waiting to explode.
To save the sale, Speaker #2 (also a mortgage broker) arranges to
transfer the rental property mortgages to the family home. The charity’s representative also tries to
save the sale by telling clients that they can increase the CRT payout rate by replacing
the relevant page of the already signed and irrevocable document. Speaker #1 continues to try to save the sale
by implying that premiums will be much lower in years after the second year (he
misrepresented that fact). Speaker #3 also
tried to save the sale by telling the clients that their CRT will simply repay
the new mortgage on their home in full, once the trust was
finalized.
The
attorney didn’t draft the ILIT until the insurance policy
has been in force for over a month. No
one bothered to tell the clients that they needed a qualified appraisal on the transferred
properties, so no income tax deduction was available, but that was not a major
issue since the clients had almost no income, so the deduction wouldn't have helped much anyway. The speakers told clients repeatedly that the
income from the CRT would cover the insurance premiums, so clients were writing
checks from the charitable trust accounts directly to the insurance
company. Over the next two years, no one
did any trust accounting or advised the clients that trust accounting would be
required. Speakers #2 and #3 invested
the CRT assets into a deferred annuity earning 6%, even though the CRT payout
rate was set at 10%, producing a declining income stream. When all the dust settled, the clients had
only $200,000 left outside of the CRT, an unaffordable and collapsing insurance
policy, a decreasing annual income, and a staggering bill for the accounting
work needed to re-file past years’ tax returns and pay penalties and interest.
What were the motivations for all of these shenanigans? Speaker #1 earned a $30,000 commission. Speaker #2 earned $4,500 in mortgage broker
fees, speakers #2 & #3 earned $12,000 in annuity commissions, and the
charity’s representative (married to Speaker #2) earned a percentage-based
bonus for bringing in the gift. Too bad,
there should have been some consideration for the client/donor and there wouldn’t have been litigation generated. If you aim for immediate gratification, you’re likely to do great harm with your toxic planning to
all involved.
© 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
CRT Planning and Books
Vaughn W. Henry
Henry & Associates
Gift and Estate Planning Resources
22 Hyde Park Place
Springfield, IL 62703 USA
Phone: (217) 529-1958 Fax: (217)529-1959
Toll-free: (800) 879-2098
E-mail: VWHenry@aol.com
CONTACT
US FOR A FREE PRELIMINARY
CASE STUDY FOR YOUR OWN CRT SCENARIO or try your own at Donor Direct. Please note -- there's much more to estate and charitable
planning than simply running software calculations, but it does give you a
chance to see how the calculations affect some of the design considerations.
This is not "do it yourself brain surgery". When is a CRUT superior
to a CRAT? Which type of CRT is best used with which assets? Although it may be
counter-intuitive, sometimes a lower payout CRUT makes more sense and pays more
total income to beneficiaries. Why? When to use a CLUT vs. CLAT and the traps
in each lead trust. Which tools work best in which planning scenarios? Check
with our office for solutions to this alphabet soup of planned giving tools.
