Planning Articles and Links

What tools and tactics work with 7520 rates

The Applicable Federal Rate (AFR) – What Works in a Changing Environment?


In 1988, TAMRA created a means to measure the time value of money for gift and estate planning functions.  Prior to 1971, the government used 3.5% as an assumed rate, but changed to a rate that floats with debt instruments, and this rate changes monthly.  Essentially, the IRS tries to determine what a stream of income or a deferred gift is worth and adjusts the value over time.  For lifetime gifts, periodically updated mortality tables provide a mechanism for estimating the “time” portion of the “time value”, but what’s needed in a present value/future value calculation is a way to assign a market interest rate.  As a result, §7520 requires that the applicable rate be based on federal securities with maturities between three and nine years.  Most estate and gift calculations use the interest rate in the month of the transfer, but for charitable gifts, there is an exception for donors who may elect to use either the current month’s rate or one from the previous two months.  The most recent* §7520 charitable midterm rate (120%) used in charitable planning calculations is the lowest rate seen in years, and may create serious problems for donors contemplating  a CRAT or CGA.  Because some charitable gifts produce a remainder value for donors or heirs, and others produce an income value, the changing rates provide a seesaw effect; as the rates go up, some transfers are more attractive and others less so.



What tools and tactics work better when Section 7520 rates are down?

Private Annuities, Grantor Retained Annuity Trusts (GRAT), Charitable Lead Annuity Trusts (CLAT), and Charitable Gifts of a Remainder Interest in a farm or residence.  Self Canceling Installment Notes (SCIN),Saleto an Intentionally Defective Irrevocable Trust (IDIT), and Dynasty Trusts pass more assets or reduce taxable transfers to remainder beneficiaries.



What tactics are more restricted when Section 7520 rates are depressed?

Grantor Retained Income Trusts (GRIT), Personal Residence Trusts and Qualified Personal Residence Trusts (PRT, QPRT), Charitable Remainder Annuity Trusts (CRAT may fail either the 10% remainder test or the Rev. Rul. 77-374 exhaustion test), Charitable Gift Annuities (CGA although the deduction goes down, the amount of principal attributed in the annuity payments goes up, if the annuity does not pass the 90% test, the charity offering the CGA may have a UBTI problem), Life Estates.



Which tools are generally unaffected by AFR changes?

Grantor Retained Unitrusts (GRUT), Charitable Remainder Unitrusts (CRUT), Charitable Lead Unitrusts (CLUT)


* Revenue Ruling 2003-71 indicates the July rate is 3.0%.  Rates for June and May were 3.6% and 3.8%, respectively.





















































































































































































































Vaughn W. Henry

PhilanthroCalc for the WebCONTACT 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.


Planning Articles and Links

IRD and IDIT Planning in the Estate – Henry & Associates

Making a Plan to Deal with EGTRRA


imageJohn and Dee Owens, both 65, have a family business that they expect to pass down to their son, John Jr., but they have other children to whom they plan to leave their stock portfolio and retirement accounts.  Through a series of corporate transactions, John Jr. will receive the stock owned by his father at no gift or estate cost and in return, his parents will have income through a deferred compensation and salary continuation agreement.  With their lifestyle and retirement security addressed, John and Dee turned their attention to their remaining assets to see how they could best pass them to their other three children who aren’t involved in the family businesses.  In 2002, the Owens’ jointly held stock portfolio had a value of $5 million and John’s IRA was worth $1.5 million.  They’ve decided to take only the minimum distributions, as required by law, to stretch out their retirement account.  This lets them leave the stock portfolio untapped to let it continue to appreciate as it has for the last 16 years.


When the Owens sat down to discuss their planning needs with their tax, legal and planning advisors, they were stunned to see how the estate tax “relief” they believed would protect their estate really affected their planning.  With Congress constantly tinkering with the estate tax by trying to raise the exempt amount, abolish the tax, or reintroduce the tax it has become increasingly difficult to plan when the goalposts keep moving.  After EGTRRA 2001, everyone agreed to plan for what they knew today, keep their planning flexible and their options open.  The result was an integration of several tactics and strategies designed to achieve a zero estate tax plan.  With only two principal assets left to plan for, and a desire to control their social capital, the Owens proceeded as follows.


Their Stock Portfolio

Given the uncertainty about the long-term nature of tax reform and estate tax relief, John and Dee decided to act now, rather than hope for an unlikely repeal of the death tax.  When the Owens saw how quickly their equity values would grow away from their ability to exempt those assets from tax, they created a family limited partnership to hold their stocks and some other investment assets.  After the partnership started, the Owens made lifetime exemption gifts of limited partnership assets to the kids, and then agreed to sell the remaining partnership units to an “intentionally defective irrevocable dynasty trust” (IDIT) for the benefit of their three kids and grandchildren.  By doing this installment sale, the Owens freeze the value, eliminate another appreciating asset from their estate and transfer the growth to their heirs.  This leaves only the need to deal with the “income in respect of a decedent” (IRD) assets found in their IRA and note to clean up the loose ends.  When their planning is finished, there should be no estate tax on their assets at death


Their IRA

By the time John and Dee factored in the required distributions commencing at age 70 and viewed how their remaining estate would appreciate to, and beyond, life expectancy, they concluded that the IRS was likely to harvest significant taxes from their estate.  Even in 2010, when the federal estate tax disappears for one year, there was still an income tax liability projected with their IRA.


imageIRA planning has been in the news lately because of relaxed new distribution rules and, some say, easier choices about beneficiary designations.  As a result, the common advice for many is to make use of a “stretch IRA” as a way to delay recognition of the deferred income for as long as possible.  That may make sense for many families, but they must understand some quirky issues if the stretch option is used.  Firstly, only a surviving spouse has the ability to “roll over” and start an IRA with new beneficiaries under his/her own life expectancy.  Secondly, while the stretched IRA may protect heirs from immediate income tax liabilities, it is not sheltered from estate tax.  This double dip by the tax collector may ultimately reduce the value of the inherited IRA by 70%.  Thirdly, after going through all of the gyrations needed to stretch an IRA and protect it from tax, many younger beneficiaries disrupt the planning by simply cashing in the IRA and paying the tax.  In their mind, it was free money and there wasn’t any reason to wait to enjoy their inheritance.  Fourthly, an IRA only produces ordinary income, taxed at higher rates than capital gains due from stock sales and lastly, the IRA can’t “step up” in basis like the inherited stock portfolio.


After the Owens reach age 70, their qualified retirement account typically won’t appreciate as quickly as the stock portfolio.  Why?  Even though invested just like their equity account, the required distributions nibble away at the IRA’s growth.  However, even with an account slowly eroded by mandatory payments, the IRA has the potential to be a significant asset and clients should know their options that include:

1.   Preserve the IRA via minimum distributions for as long as possible and split it into multiple accounts.  Then name each beneficiary to receive the proceeds over their life expectancies.  Seek competent counsel in this area, as the rules change based on the IRA owner’s payout status.

2.   Spend the IRA (qualified retirement plan asset) and don’t pass anything to heirs.  While this solves the estate and inherited income tax problem, there is a timing issue (running out of money before running out of time) involved unless the account is annuitized.

3.   Take withdrawals from the IRA and buy life insurance to replace the value of assets transferred to charity.  Whether this option is economical depends on the client’s age, health, tax status, and timing of death.  Success also depends on the insurance ownership being outside the estate to avoid unnecessary taxes on the proceeds.

4.   Take taxable withdrawals from the IRA and set up a concurrent charitable remainder trust with the appreciated equity portfolio.  Use the tax deduction to offset the IRA tax liabilities and the extra cash flow to buy life insurance inside an irrevocable trust.  Insurance proceeds structured in this fashion are generally income and estate tax free, and more net wealth may accrue to the heirs without concerns about a loss of step up in basis.

5.   Name a charitable remainder trust (probably a CRUT rather than a CRAT) as the IRA beneficiary for the surviving spouse, or name children as income beneficiaries if all of the estate planning tax considerations have been addressed.  Besides minimizing the immediate recognition of ordinary income, it provides a structured way to ensure the heirs won’t fritter away the proceeds.  Additionally, it may eventually allow capital gains income distributions from the trust instead of being an ordinary income pump for life.

6.   Name a charity to be the IRA beneficiary in order to establish a gift annuity for a surviving spouse.  It’s also possible to name children as annuitants, but this has to be handled properly because of the nature of the contracts and the potential for gift or estate tax liabilities.

7.   Name a charity as the IRA beneficiary to pass to a nonprofit organization those assets subject to tax.  That lets heirs receive capital assets that will step up in basis at death.  This choice is especially useful for clients with a desire to support charity and do so tax efficiently.

Planning Articles and Links

Donors and Their Planned Gifts – Henry & Associates

Donors and Their Planned Gifts – Henry & Associates

Donor Motivations – Don’t Make Assumptions

What Motivates Donors?  
NCPG 2000 Survey of Donors


Charitable Bequest Donors vs. CRT Donors

Percent of donors citing “a desire to support the charity” as an important factor in their decision to make a gift97%91%
Percent of donors citing “the ultimate use of the gift by the charity” as an important factor in their decision to make a gift82%79%
Percent of donors citing “desire to reduce taxes (income or estate)” as an important factor in their decision to make a gift35%77%
Percent of donors citing “long-range estate and financial planning issues” as important factors in their decision to make a gift35%76%
Percent of gift donors who report no affiliation with the charity that will benefit from their planned gift.21%24%
Percent of gift donors who have not notified the charitable beneficiary of their gift.68%50%
Donors citing a financial or legal advisor as the first source of the idea for their gift28%68%
Donors citing a charity’s published material as the first source of the idea for their gift34%26%
Planned Giving in the United States 2000: A Survey of Donors (NCPG  

Planned giving is generally situational.  That is to say, the eventual gift to a charity may be a secondary consideration if it solves a current problem for the donor client.  As situations change, the opportunity to introduce a planned giving solution must adjust as well.  This is one reason that advisors need to promote and constantly reintroduce the use of planned gifts, since donor needs change.  What might not have been appropriate once may now be an ideal situation to make a gift.  Remember, planned gifts usually are made with assets, but annual gifts tend to come from income.  Planners need a different mindset to use both properly, as each type of asset triggers a different set of planning tools or concerns.  While donative intent is important, after all, it is a charitable planning tool; there may also be split-interest gifts generating legitimate donor benefits as well.

Gifts of Securities – these are excellent sources of charitable support.  Rather than sell $130 of stock and pay tax on the gain in order to make $100 gift, it’s much better to make the gift of appreciated stock directly to charity.  The nonprofit organization doesn’t pay tax on the paper profit and receives 100% of the fair market proceeds, while the donor gets a tax deduction for the entire value.  There are cautions about using stock as gifts, e.g., is the stock publicly traded or restricted in any way?  Rule 144 stock owned by insiders, or acquired with stock options, may create problems.  For mutual funds, the fair market value that fixes the gift for IRS tax deductions is the value at the close of trading, while individual stocks are valued as an average of the high and low for the day’s trading.  Closely-held stock in family businesses is more difficult to value and market when given to a nonprofit organization, and if the gift is intended for a private foundation, the deduction isn’t fair market value; instead, it’s the donor’s taxable basis.  S corporation stock must be carefully handled.  While recent changes in tax law allow its ownership by charitable organizations, the tax treatment often makes it an unattractive asset to receive by a tax-exempt entity.

Real Estate – great gifts, but there are more issues than with gifts of cash or stock.  Will there be environmental or legal restrictions on land use that affect its salability?  Was land held for development?  If so, it may be treated as an ordinary income asset or inventory, thus the deduction is limited to basis.  If it’s not inventory property, then is it mortgaged or encumbered?  Is it readily marketable?  If so, is there a buyer in the wings?  One of the problems with real estate contributions to a charitable trust is having the IRS label the sale as a step transaction, so any pre-arranged sales or disqualified persons acting as buyers may trigger future problems when a CRT is used, but the same concerns may not be a problem for a charitable gift annuity.

Life Income Plans – charitable gift annuities, charitable remainder trusts, pooled income funds and life estates all offer donors a chance to use an income tax deduction now for a gift that won’t pass to the charity until some time in the future.  Each type of tool provides the donor with varying degrees of control over the final disposition of the gift, the need for experienced private sector advisors and changing levels of income benefits.

Life Insurance, Retirement Accounts  & Savings Bonds – are terrific gifts, many times directed by beneficiary designation, and with savings bonds and retirement savings the donor avoids IRD treatment by passing 100% of the value directly to charity.

Don’t Make Assumptions

31% of all planned gift donors have never made even a cash contribution to the charity that benefits from their planned gift. Don’t make assumptions about your client/donor base.  While many donors are motivated by the most altruistic of intentions, there are other reasons for their charitable impulses (control, guilt, social interactions, religious, tax relief, community building, repayment, etc.) and commercial advisors may suggest a private foundation as a part of an estate plan.  Foundations have been used for years by the well to do.  Although with an increasing accumulation of wealth in the hands of the middle class, many of these families are now in the enviable position to create a family foundation as well.  From a “social capita” perspective, most people understand they have assets over which they will exert no control at death.  Therefore, they need to decide whether they want those dollars used to pay tax (an involuntary philanthropic payment to the IRS) or to self-directed charitable entities.

How best to regain control over those assets?  Consider using a private foundation for larger estates and a community foundation with a donor advised fund for smaller estates.  Where’s the break point?  Generally, $5 million or less going into a private foundation with family control is of marginal effectiveness from a management point of view.  The costs for creating the entity (either as a corporation or a trust), maintaining the records, filing the tax returns and paying the 2% excise tax that private foundations are required to submit are likely to erode the income and principal available to meet the required 5% payout for its charitable purpose.  An alternative tool is the increasingly popular “donor advised fund” in a community foundation.  The DAF provides the family with a voice in decisions to support charitable organizations of interest to them within the framework of a tax-exempt public charity.  Besides offering guidance, staffing and infrastructure, a community foundation provides a more attractive way to make use of the charitable income tax deduction for many assets like closely held stock and tangible property.  Additionally, using a community foundation avoids many of the tax traps associated with private foundations with regard to disqualified persons, prohibited transactions, self dealing and private inurement that gives the IRS ways to crack open a foundation and penalize its board for inadvertent mistakes or improper activities.  Properly done, this strategy offers advisors great opportunities to help their clients achieve a sense of fulfillment otherwise unavailable in traditional estate planning — offer it as an option and see where it takes the conversation.

PhilanthroCalc for the WebCONTACT 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.

Planning Articles and Links

Perserverance – Why Concepts Must Be Introduced Frequently — Henry & Associates

imageValidating the Planning Process

Why Non-estate Planning Professionals Should Learn More About Tax Planning


“When you come to the end of your rope, tie a knot and hang on.”



Perseverance  Sometimes that’s what makes estate and gift planning work.  Logically, clients understand that they need to plan, and occasionally they are even prompted by external events to start the planning process, but they lose focus, priorities shift and estate planning drops off the radar screen.  How to counter this on and off approach?  Many professional planners distribute articles and case studies as examples of successful outcomes as a way to help focus on possible solutions.  Although clients see the plan and may recognize its potential, unless it’s immediately relevant, they mentally file it away and are not motivated to act, no matter how logical the plan might be.  And of course, logic doesn’t drive the estate planning process, emotion does.  But circumstances can change, and suddenly what was once an obscure solution to a complex planning problem suddenly becomes the answer needed today.  That’s why it’s so important to keep preaching the need to plan and to continue showing options.


Professor James Watson, an electrical engineering department head at the university, maintains close contacts with many of his students, who view him as an objective advisor to their ventures in the world of technology.  A graduate of the EE program mentioned that his closely held company was in play, with two large communications conglomerates seeking to buy his corporation for its expertise and patents.  The entrepreneur, V. J. Patel, started his business working out of his home by employing his cousin and concentrating his technical skills on building software and hardware solutions to a nagging telecommunications network bottleneck.  Admitting that sometimes it’s better to be lucky than smart, the Patels now find themselves selling founder’s stock in their corporation and are faced with a significant capital gains liability.  Professor Watson suggested that while he didn’t know all the technical details, he did remember a faculty workshop on estate and gift planning that mentioned income and estate tax benefits for business owners selling their companies.  Dr. Watson also knew that the benefits of these charitable trusts offered his graduates an opportunity to give something back to the university, and his department specifically, to encourage and develop future entrepreneurs.  So he set up a joint meeting between his old students and a gift and estate planning team to explore their options.  Taking into account their age, a desire to keep busy developing new projects and their family orientation, it was impractical for the Patels to contribute all of their stock to a CRT, but after considering their needs for income security, tax relief, financial independence and charitable interests, a plan evolved.


What the professional advisors suggested was a part sale/part gift strategy.  By combining a CRT and its income tax deductions to “wash the sale”, the Patels will be able to sell some of their stock in a taxable sale to keep some tax-free “seed money” to reinvest and start a series of new projects without compromising their financial security.


imageWhat lessons can be learned from this?  Sometimes it more important to learn to recognize the planning opportunities and suggest broad stroke planning solutions and let the technical experts fill in the gaps for the clients.  A referral to an expert and a recommendation from trusted advisors to consider alternative planning scenarios is a great way to validate options, even if all the details aren’t fully explained in the first meeting, the fact that it’s suggested by more than one person gives clients comfort that the technique may be a viable solution.  A charitable financial or estate plan often fits into many clients’ way of thinking, so it’s up to their advisors to elicit those priorities through a values based approach to arranging their affairs.


Planning Articles and Links

Take Charge – Avoid Planning Pitfalls – Vaughn Henry & Associates

Take Charge – Avoid Planning Pitfalls – Vaughn Henry & Associates

Take Charge – Avoid Planning Pitfalls

Vaughn W. Henry © 1999

“Over and over again, the courts have said there is nothing sinister in so arranging one’s affairs as to keep taxes as low as possible. Everybody does so, rich and poor, and all do right for nobody owes any duty to pay more tax than the law demands. Taxes are enforced exactions, not voluntary contributions.” — Judge Learned Hand, 1934

f you adopt this philosophy-and most reasonable people do, consider this. With income tax, you get a chance every year to make sure you’re arranging your affairs the way you want them. But you only get one chance with estate taxes-and that chance is your estate plan.

veryone should have a plan that conserves and distributes assets, provides income for survivors, and prevents unnecessary payment of excessive tax or transfer costs. A carefully crafted estate plan even offers you an opportunity to pass down something along with your property; that is, your system of values.

ot only should you have this kind of plan-you can. This isn’t just an abstract, unachievable goal; it’s a real possibility. But it doesn’t always happen that way. When we examine why, we find the reasons fall into two general categories. Both professional advisors and their clients bear some of the responsibility when estate plans fail to achieve their ideal objectives.

What? Me? A Client?

he alarming fact is many clients don’t even realize they need estate-planning help. They fail to recognize that their assets have appreciated to the point where estate taxes are a concern. They don’t realize that the combined value of appreciated real estate, a retirement plan, insurance proceeds, ownership interest in a family business, and other assets pushes their net worth beyond the limits of the current $650,000 estate tax exemption-if they even realize such an exemption exists. So they never become clients-or become clients too late in the game to take advantage of all available options.

“Estate taxes are the government’s way of making up for all the cheating you did on income taxes.”— Will Rogers

onsider the classic example of the midwestern farmer. Over the years he has heeded his advisors’ advice. He has deferred income-and consequently, income tax–by not selling product, prepaying for supplies, trading in equipment and upgrading without selling. He has lived poor-but he’s going to die rich. And as his assets balloon in value, so does the potential for estate tax liabilities. Still other clients recognize they have estate tax liabilities-but allow a “paralysis by analysis” mentality to set in, which prevents them from making the decisions they need to make to set a plan in motion. Even the best plan is bound to fail without if no one follows it through.

Advice for Advisors

rofessional advisors have an obligation to educate clients-to offer them estate-planning options they may not know are available to them. But too often, these advisors make invalid assumptions. Some-like an attorney I met recently who advises farmers in an area where farm land routinely sells for $3,000 to $4,000 an acre–assume their clients aren’t wealthy enough to have estate tax liabilities. Guess again.

ome advisors even assume their clients don’t mind paying estate taxes so long as heirs receive significant assets and all taxes and fees are paid.

ome take a reactive rather than a proactive position with their clients. Adopting the attitude that “the customer is always right,” they give their clients precisely what they ask for. The result is that clients are limited in their options by their own knowledge.

nd some are simply ill equipped to advise their clients effectively. As general practitioners, they haven’t the time or inclination to keep up with subtle changes in estate tax law. They lack the technical expertise to craft anything but a “cookie cutter” plan.

Now for the good news.

here are several tools available to minimize or even eliminate estate and gift taxes entirely. You won’t learn about them in any government pamphlet. But qualified advisors can show you how to legally and ethically disinherit the IRS, while addressing common concerns like providing for disabled dependents, managing assets for minor children, and charitable giving.

ncreasingly popular are plans that decide in advance, what percentage of the estate will pass to children, charity, and the government. Anyone with appreciated assets might be well advised to look into a §664 Charitable Remainder Trust (CRT) plan. The Charitable Remainder Trust offers many advantages, including life-time income security, reduced income and estate taxes, plus the opportunity to direct family wealth according to their own values.

haritable Remainder Trust planning is a highly specialized field that encompasses both estate and wealth preservation planning. These trusts are complex in design-certainly not a do-it-yourself project. And they’re not the best strategy for everyone.

n fact, there’s no such thing as a one-size-fits-all estate plan. The most successful plans are drafted by a team of qualified advisors-a team that takes the “big picture” into consideration and offers you a range of flexible strategies. With forethought and early planning, your estate plan can help you achieve your financial, familial and philanthropic objectives.

Henry & Associate

For more articles and case studies, go to

Planning Articles and Links

Strategic Alliances Between Nonprofit and For-Profit Plannners

Strategic Alliances Between Nonprofit and For-Profit Plannners

Strategic Alliances — For-Profit and Nonprofit Planners

 It has been long assumed that planned giving officers and planners in the for-profit community have entirely different motivations and priorities when dealing with their client-donors. Usually, the Planned Giving Officer wants to position the charitable institution to receive current and deferred gifts in maximum amounts. The professional advisers, on the other hand, counsel tax efficient giving, if they suggest any charitable support at all. Even with these different approaches, the client-donor has similar expectations for both sets of advisers and apparently is not receiving the level of assistance needed from either group.

A recently released study by Prince and Associates surveyed donors, professional advisers and planned giving officers employed by nonprofit organizations. The survey results were alarming according to some experts, and disappointing to say the least. The most surprising finding was, in terms of competence and technical expertise, the advisers who claimed planned giving as a major part of their practice generally lacked the necessary background to properly advise their clients. Randomly generated estate planning and planned gifting questions on a self administered exam produced no group average scoring above 70%, the minimum passing grade. Test scores were best among attorneys who practiced in the estate planning arena and worst among the charity’s fund-raising employees, but it’s important to note that all groups performed under levels considered acceptable by the test creators. What this means is that continuing education needs to be an ongoing requirement and different levels of training needs to be available for all those who make planned giving a part of their practices. To provide advisers with an opportunity to review planning techniques, computer software, case studies, new tax law and client-donor presentations we have made several valuable programs available. First on the list is a short program, “Planned Giving for Dummies”, designed for the beginning development officer and for-profit adviser who needs an introductory course to acquaint them with basic planned giving concepts. There are no prerequisites, as we assume no prior knowledge about either estate planning or charitable tools and start the class at a beginning level. Besides this starter course, we also offer 2, 3, 4 and 6-hour programs designed to provide more technical material for professional advisers and development officers. Please contact our office for a list of low-cost programs available in your area for advisers, board members and fund-raisers. Many programs offer Continuing Education credits needed for professional licensing, and may serve as a tool to encourage better communication and may foster strategic alliances between the for-profit and not-for-profit communities.

 What Donors Want in Their Charitable Advisers

Planned Giving Officers

Pro- Advisers

Expertise in the technical details of executing the planned gift



Skill and efficiency in working with the donor’s professional advisers or with the charity



Willingness to let the donor set the pace in the planned giving process



Help in deciding what type of planned gift to make



Knowledgeable about the advantages and disadvantages of each type of planned gift



Sophisticated understanding of the donor’s personal motivations to give



Effectiveness in getting the charity to treat the donor as he or she wants to be treated



Note: 603 donors(*) surveyed(**)

(*) Donors in the survey had made planned gifts worth at least $75,000 and had a net worth of $5 million or more.

(**) Source: Prince & Associates and Private Wealth Consultants, 1997

Henry & Associates

Planning Articles and Links




CRT Case Study: Bill Webster, nearing retirement as CEO of IC Corp., had family working in his growing business. As a primary goal, he wanted to shift his 60% stock ownership to the kids without creating significant income tax or gift tax burdens. Like many hi-tech industries, IC Corporation started on a “shoestring” as a supplier of resins for integrated computer chips. The corporation had significant retained earnings, since profits were consistently plowed back into the rapidly growing business. The firm’s accountant cautioned Bill about the IRS penalty on this surplus and advised him to declare dividends. Mr. Webster resisted that suggestion because of the double taxation penalty. On the other hand, he was unwilling to sell his low basis stock and pay the capital gains tax. Why? The stock sale option would have reduced by nearly a third the $1 million in sale proceeds, and limited his opportunity to reinvest for a comfortable retirement. (see chart below)

A powerful solution existed by creating an IRC Section 664 Trust and transferring Mr. Webster’s stock to this trust. The highly appreciated stock was then redeemed from the trust at fair market value by the corporation and retired. The heirs received control of the business, as their minority ownership was converted to a majority interest when his stock was retired as treasury stock. Additionally, the accumulated earnings penalty was avoided, since the problem surplus was reduced by the company’s stock redemption. Mr. Webster simultaneously established an account funding his retirement without paying any capital gains tax on the transfer of this highly appreciated asset. An additional advantage of this trust scenario allowed his funds to continue growing in a tax-deferred environment and further compound in value. Although this briefly summarized technique required highly competent financial, legal and tax advisors, it offered a closely-held business owner an excellent opportunity to free up otherwise locked in value. IRS control was eliminated, Mr. Webster enhanced his income and the business went to family members in a tax advantaged fashion.

ãVaughn W. Henry, Henry & Assoc. 1996

Springfield, Illinois 62703-5314 [home

Email[email protected]

 Corporate Stock Redemption via CRT


Option A

Keep Asset

Option B

Sell Asset

Option C

664 Trust

Sale of Stock With Zero Basis $1,000,000
Capital Gains (Federal & State) at 31% – 310,000
Amount Invested/Reinvested $1,000,000 $ 690,000 $1,000,000
Income Produced Now at 3% $ 30,000
Income In New Investment at 9% $ 62,900
7% Payout from Trust Earning 9% $ 90,652 *
After-Tax (Combined at 40%) Cash Flow $ 18,000 $ 37,260 $ 54,391
Additional Joint Life Expectancy for 65/64 Yr. Old Married Couple 26 Years 26 Years 26 Years
Total Lifetime Income & Tax Savings $ 468,000 $ 968,760 $1,518,026
Total Increase /Retirement Cash Flow $ 500,760 $1,050,026

The illustrated IRC § 664 Trust calculations were based on the income beneficiaries’ ages of 65 and 64. The current asset, a closely-held “C” corporation, previously produced a return of 3% of market value. IRC Section 7520 rate (7.6%) was used and when assets were sold and repositioned for increased income potential, the new comparable risk portfolios were assumed to earn 9% on their pre-tax yields. As a component of an integrated estate plan, this trust offers business owners and their heirs the opportunity to redirect their “Social Capital” and keep control of assets that otherwise would default to the IRS.

* Average annual payout over projected joint lives of income recipients.

Vaughn W. Henry – Gift & Estate Planning Services. As a professional courtesy, we provide hypothetical CRT evaluations for advisors. See form format.