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CHARITABLE REMAINDER TRUSTSEXAMPLE 12.19 (CONTINUED)company. She realizes that this kind of program, if promoted within the company, could becoordinated with an external public relations campaign to make a significant impact in thecommunity where the company does business.With the assistance of a charitable gift planner and her lawyer, A develops the followingplan: (1) she authorizes the establishment of a NIMCRUT, with herself as the trustee; (2) shecontinues to exercise her stock options systematically; (3) after holding the stock for at least oneyear, she will contribute to the trust $100,000 of stock per year for 10 years (generatingapproximately $240,000 in income tax deductions); (4) as trustee, she will sell the stock andreport the sale as a beneficial owner; (5) she will select an investment objective so that theassets will compound tax-free for 10 years (at which time she will begin receiving income fromthe trust); (6) if the trust’s assets are invested at an 8 percent return, the account balance when Abecomes 65 would be $1.5 million; (7) if the unitrust amount payable was set at 8 percent, shewould receive a lifetime income of $120,000 per year; (8) she will make annual contributionsof $16,200 for 11 years to a wealth replacement trust, designed to provide a benefit to herchildren to replace the value of her charitable gifts (they will receive $1 million free of incomeand estate taxes from her estate); (9) and, at the death of A, the principal in the NIMCRUT (the$1.5 million plus undistributed earnings) will be paid to the designated charities.EXAMPLE 12.20H and W, both aged 61, own a company. When they started, H was the sales, marketing, andpublic relations departments; W was the receptionist, controller, and customer servicedepartment. Years later, they employ 8 individuals and the business has annual revenue of $4.4million. Their combined salaries are $290,000. Recently, as H and W began thinking aboutretirement, they were approached by a business broker who thought the business could be soldfor as much as $3 million.They began reviewing the numbers. They set the sales price at $2.5 million (to be morerealistic), on the assumption that the assets were worth $1.5 million and a consulting contract(with an agreement not to compete) would have a value of $1 million. The corporate tax on thesale of the assets, however, would be about $500,000. Thus, they would have $2 million ofincome, with corresponding income tax liability of about $700,000.Under this approach, H and W would end up with $1.3 million. This, when invested, wouldproduce only about $100,000 per year—far short of the $290,000 to which they had becomeaccustomed. They agreed that they needed income of at least $150,000 to be comfortable. Thus,it seemed that after two lifetimes of building the business, H and W could not afford to sell it.However, a charitable gift planner showed H and W a way out of this dilemma. The strategyinvolved use of a CRT. H and W had never considered themselves in a position to make a majorcharitable gift, but nonetheless liked the idea—as long as their three children would not bedeprived of a reasonable inheritance. The plan had these objectives: (1) sell the business with aminimum of tax; (2) generate income of at least $150,000 annually; (3) maintain at least$500,000 in liquid assets; (4) provide a substantial inheritance for their children; and (5) leave amajor gift to one or more charitable organizations.H and W agreed to the following plan, as devised by the charitable gift planner and theirlawyer: (1) they will transfer their stock in the company to a CRUT (thereby receiving anincome tax charitable contribution deduction of approximately $225,000, which will be usedto offset part of their taxable income in the year of sale); (2) the trustees of the trust (H and W)will negotiate sale of the stock for $1.5 million; (3) the purchaser will pay $1 million pursuantto a covenant not to compete and a consulting contract, so that H and W will incur about$250,000 in income tax (when the income tax deduction is considered), leaving $750,000 toinvest; (4) the investment of the $750,000 will produce $60,000 in annual income; (5) thetrustees will invest the $1.5 million (the proceeds from the sale of the stock) in incomeproducingassets; (6) the trust will pay H and W 8 percent of the value of the trust each year(expected to be $120,000); (7) they will allocate $25,000 per year for 11 years to a wealthreplacement trust, which will generate an inheritance; (8) when H and W die, the wealthreplacement trust will provide to their heirs $150,000 free of income and estate taxes; and (9)when they die, the assets remaining in the CRUT ($1.5 million plus undistributed earnings) willbe paid to the charitable organizations that are the remainder interest beneficiaries of the trust. aaThe illustrations in Examples 12.19 and 12.20 were provided courtesy of Lane Planning Co., Bethesda, Maryland. 470