ELITE ADVISOR BEST PRACTICES

Estate Planning for the Affluent Who Have Few Immediate Relatives

A charitable remainder trust success story

By Randy Fox

Key Takeaways:

  • An estate plan should be gauged on more than just its economic success. There are often social, emotional and spiritual elements to the plan that are desired by the family.
  • A NIMCRUT can be funded with a variable annuity.
  • A NIMCRUT enables wealthy clients to transfer assets to a charitable trust and then choose to defer or receive income from those assets for their lifetimes. Upon the client’s death, their preferred charities receive in full the remainder of the assets left in the client’s trust.


This article is courtesy of The Planned Giving Design Center, the world’s largest community of planned-giving professionals.

Few advisors ever get to witness the full results of their planning efforts because the life cycle of many plans is at least a generation in duration, and often multigenerational. Measuring the success or failure of our planning efforts can be a challenge and often leaves advisors frustrated and feeling unfulfilled by their efforts. Additionally, there is a tendency to gauge the results of the plan only by its economic impact while ignoring the social, emotional and spiritual elements of the plan that are desired by the family. Occasionally, however, we are able to witness a plan that moves all the way to completion and assess the work we’ve done on behalf of our clients.

Real-life case study: Curtis Brooks

Such is the case of Curtis Brooks, who died recently at age 87 after a brief illness. Curtis had been a client for 17 years, and much of his planning had been implemented in the very early stages of the planning relationship. The plan had been tested over a significant amount of time that included several market cycles, multiple tax laws, and changes to Curtis’ family and relationships. The measure of success not only includes the economic results of the plan, but whether or not Curtis’ life goals were met.

Curtis had been a bachelor his entire life. Although he had several nieces and nephews as well as a few friends--one specifically--that he wanted to help out financially, Curtis really wanted much of his $10 million estate to benefit several charities that he supported. A great deal of Curtis’ wealth was in his collection of fine artifacts, which he had accumulated over the years. While he wanted the majority of those pieces to become part of a permanently endowed collection at a local art museum, the curators at the museum felt the collection was too large for them to absorb. Further, they deemed many of the pieces to be of less than museum quality. Diplomacy was not the museum staff’s strong suit, but the museum’s needs were something that we had to deal with in the course of our planning.

NIMCRUTs

One of the primary planning tools that we utilized for Curtis was a Net Income with Makeup Charitable Remainder Trust (NIMCRUT). This trust was funded in 1995 with approximately $800,000 of appreciated securities. The trust was established to accomplish several of Curtis’ major goals:

  • To avoid immediate capital gains tax on the sale of his marketable securities
  • To provide an income stream for the benefit of Curtis’ close friend but not until after Curtis died
  • To endow the collection that Curtis would leave to the art museum
  • To give Curtis an income tax charitable deduction in a high-income-tax year

A NIMCRUT was utilized and funded with a deferred variable annuity. This was done so that the NIMCRUT would produce no income during Curtis’ lifetime, since Curtis had other sources that already supported his lifestyle requirements.

When Curtis died this year, the value of the NIMCRUT had more than doubled. Since the annuity utilized Curtis as the measuring life, it would pay out all of those funds to the NIMCRUT. All of the proceeds above the original funding amount of $800,000 would be considered “income” for trust accounting purposes, and this would be utilized to fund the income stream for Curtis’ friend. While the value of the income stream would be included in Curtis’ estate for estate tax purposes, we had already considered this in the original planning. We were also fortunate that the personal exemption amount for 2012 was $5 million, which allowed for additional flexibility in disposing of the balance of Curtis’ estate. Because no funds had been paid out of the NIMCRUT during Curtis’ lifetime, there is a considerable “makeup” account balance that will ensure steady income for years to come. While the art museum will have to wait perhaps as long as 20 years for the NIMCRUT remainder to be paid, it is receiving additional other funds and artifacts to maintain the collection in the meantime.

Curtis’ home, which was donated in a life estate agreement several years ago, will now be liquidated by the art museum. This should provide close to $1 million of immediate funding for the museum. Additionally, Curtis left about 25 percent of his securities portfolio to provide for the collection, which should add another $1 million. Several other charities will benefit with close to $1 million each, and Curtis has managed to disinherit the IRS at the same time.

Conclusion

The final disposition of the estate of Curtis Brooks will demonstrate that he achieved each one of his planning goals. He was able to benefit his friends, his family, and the charities that he admired and supported. What’s more, he did this while not inhibiting his lifestyle while he was alive. He also saved considerable income taxes along the way and took the IRS out of his plans at the same time. While I lost a good client and friend, I can feel some sense of accomplishment that I was able to allow Curtis to achieve all of his planning goals. This is a rare case that has allowed me to witness a plan going through its entire cycle and one where I can point to a satisfying success.


About the Author

Randy Fox is Editor in Chief of Planned Giving Design Center and is the regional representative of Charitable Giving Resource Center.