By NIKI READING
The Wall Street Journal
March 5, 2013
The 65-year-old woman had recently lost her husband, and a significant chunk of her monthly income.
The husband’s pension didn’t include survivor benefits, and the widow’s own Social Security and pension benefits provided just $2,000 in monthly income—far less than her $4,000 in monthly expenses.
With only $35,000 in a bank account and a $25,000 annuity, she was on pace to run out of money before she turned 80.
Sheldon Weiner, a fee-based financial planner at Egan, Berger & Weiner in Vienna, Va., says:
“She certainly didn’t have enough to last a normal lifetime, and she recognized that,” says Weiner, whose firm manages $300 million for about 400 clients.
When she was referred to Mr. Weiner by a friend, the woman told the adviser that her accountant recommended selling her only remaining significant asset: A piece of vacant farmland her husband had bought in the 1950s.
There were two problems with that plan: Selling the property, valued at $1.4 million, would trigger a large capital-gains tax bill and reduce the amount of money left for her to live on. Plus, the woman’s family was counting on that land for their inheritance.
Mr. Weiner realized his client needed to make the most of this single asset. “I said, ‘Let’s stop and think this out,’ “ he says.
His solution: Create a charitable remainder trust and donate the land to it. The trust could then sell the land without paying capital-gains taxes, and Mr. Weiner could invest the proceeds into other vehicles for growth.
Working with the client’s accountant, Mr. Weiner calculated the woman could withdraw 7% a year from the trust and still maintain the minimum balance in the trust required by law. That payout rate would give her about $100,000 a year in income—more than enough to cover her expenses.
The woman could then use the additional income to provide a replacement asset for her heirs to inherit. Mr. Weiner recommended she spend about $16,000 per year on a guaranteed universal life insurance policy with a $1.5 million death benefit, payable to her grandchildren upon her death. The policy would be held in an irrevocable life insurance trust, so the family would not have to pay estate taxes on it.
Mr. Weiner’s plan kept everyone happy: The woman’s finances were secure and her grandchildren would inherit a $1.5 million life insurance policy tax-free.
The client was excited by the solution, but first called her daughter, a lawyer, to discuss the plan. The daughter liked the idea and agreed to be the trustee for the charitable remainder trust. Mr. Weiner transferred the farmland to the trust, and as soon as it sold he put 40% of the proceeds into equity investments and 60% in fixed income.
One more bonus: The charitable donation created such a large tax deduction that she owed no income taxes on the first several years’ of income from the trust.
The client lived into her 80s and died in 2012. During those years, she was able to withdraw $1.5 million in income and still leave about $900,000 in the trust for charity. Her heirs received a $1.5 million inheritance. Plus, the woman was able to plan for charitable gifts she never imagined were possible when facing the prospect of running out of money.
“Some of the money went to her church,” Mr. Weiner says. “I think she was happiest about that.”