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Wednesday, May 8, 2024
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Case Studies |
Salesman Closes Deal on CRAT
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Case:
Ken Blair, 60, is retiring this year. After 30 years in the automobile business, Ken is ready and, more importantly, able to call it quits. Ken has worked very closely with his financial advisor, Peter James, and is pleased with his retirement plan's success. Ken's IRA is currently valued at $1 million, and Ken also has an individual stock account valued at $800,000. Ken owns his $400,000 home free and clear. After a review of Ken's financial situation, Peter and Ken determined that Ken needs $80,000 per year for a comfortable retirement lifestyle.
Ken has been very involved with a local rescue mission and has made small gifts to the mission for many years. He wants to make a substantial gift during his lifetime that would demonstrate his love and commitment to the mission. He knows that he has limited resources but wants to explore his options.
Question:
Ken asks Peter if there was a way to make a substantial gift to the mission during his lifetime, yet ensure that his retirement income remains secure.
Solution:
Because the IRA grows tax free, Peter suggested using the individual account of stocks for Ken's current income needs and charitable goals. This would allow the $1 million IRA to continue growing tax free and untouched until Ken turns 70 ½. Assuming a 7% return, the IRA would be nearly $2 million when Ken is 70. At that time, Ken would have to begin taking his minimum required distributions. By taking a mere 4% from the IRA, his required minimum distribution in year one, Ken could easily satisfy his $80,000 yearly income requirement.
With respect to making a gift to the mission and providing income for Ken from age 60-70, Peter recommended a charitable remainder annuity trust (CRAT). Ken would transfer his $800,000 block of stocks into a CRAT, which would have a 10% payout for a term of 10 years. Ken's CRAT would pay out $80,000 each year until Ken turned 70. Furthermore, Ken would generate a $203,000 charitable tax deduction and bypass the capital gain on the block of stocks. Finally, at the end of the 10-year term, the mission would receive over $550,000.
Ken knows a good deal when he sees it, and quickly agrees to "close the deal." By creatively using a CRAT, Ken was able to achieve both his financial and charitable goals.
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