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Brendan Freeman:
Welcome o the First Business Bank podcast. I'm Brendan Freeman, and I'm your host for today's episode about the benefits of charitable trust for business owners. To help explore this topic further, I've invited one of my colleagues from our private wealth team at First Business Bank, Cymbre Van Fossen, to join me. Cymbre, welcome. Would you mind introducing yourself for us?
Cymbre Van Fossen:
Thank you, Brendan, happy to. My name again is Cymbre Van Fossen. I've worked here at First Business for almost 18 years, and I head up our fiduciary services for the private wealth team. One of the things I love most about my work is I get to work with interesting families and business owners and help them through the big transitions in life. Sometimes those big transitions include business sales or the death or retirement of business owners. I love helping families and helping them set up to benefit the charities they believe in most.
Brendan Freeman:
Well, we're glad you're here. Thanks, Cymbre. Why don't we just jump right in. Since we're talking about charitable trusts today, can you explain a little bit what a charitable trust is and why would someone want to set a charitable trust up?
Cymbre Van Fossen:
Yeah. Well, that's a great question. When people hear the word trust, I think sometimes everything turns off. The term alone makes them feel a bit anxious. But in fact, a charitable trust is just another way of structuring your charitable giving. People are familiar with of course, giving cash to a charity that they want to benefit or gifting low basis stock, or perhaps even making gifts out of their IRAs. They're less familiar with trusts, which really allow for structuring your giving over a period of time. And depending on the type of trust, you can be benefiting your family with, say a stream of income and leaving the residue to a charity, or conversely, you can be benefiting a charity upfront and leaving the residue to your family at the end.
Cymbre Van Fossen:
Different types of trust vehicles have different benefits from an estate planning perspective, from a tax reduction standpoint, whether it's income or estate tax. It can also help pass on business assets to the next generation, and again, diversify and provide for a stream of income for your loved ones. So without getting into too many details, trusts are just a very helpful way to make those charitable gifts.
Brendan Freeman:
It definitely sounds like there's a lot to it and it can get complicated quick, but the basics and the fundamentals are just as you just described as a trust. So within a charitable trust and within this concept of charitable trusts, can you talk about the main types of trust that are considered charitable trusts and maybe what some of the benefits of those trusts might be?
Cymbre Van Fossen:
Charitable trusts tend to fall into two different categories, either charitable remainder trusts or charitable lead trusts. Charitable trusts really have a concept that deals with a split interest. The interest of the trust is going to be for the benefit of a family upfront with the remainder going to a charity if you have a charitable remainder trust, as the name implies. With a charitable-
Brendan Freeman:
Yeah. Just as the name says, yeah.
Cymbre Van Fossen:
Yeah, exactly what it says. With a charitable lead trust, the benefit goes to the charity upfront. So the charity is getting a stream of income for a period of years, with whatever's left going to the family members, usually after that period of years or at the death of the original grantor. So there are lots of technical terms, but really charitable remainder trusts, again, give you the ability to gift assets and to have them sold by what's considered a charitable entity.
Cymbre Van Fossen:
A charitable remainder trust is considered a charitable entity, so there are no recognized capital gains. And then those assets can be invested and they produce a stream of income, which is distributed to the original grantor, the funder of the trust, or his family. And then the remainder, because those assets are invested, have grown, and after a period of years or at death, those go on to a charity. So there's a nice benefit for that charity at the end of the day. And again, with the lead, a similar concept. You can gift particular assets, sell those within the trust itself, and provide for that charity right upfront.
Brendan Freeman:
Okay. I think it makes sense. I think I have it. I might have to come back to you with more if needed. Okay. So let's put this in the context of a lot of our listeners here in terms of our business owner clients. Often they build up significant enterprise value within their private company, or they're clearly on some type of growth trajectory. In terms of these trusts that you're mentioning and the different vehicles that are available to our clients and these business owners, what should they be thinking about in terms of those vehicles? In terms of capital gain, you referenced that, as well as a estate tax. Is one vehicle better than another? Can you walk through that a little bit?
Cymbre Van Fossen:
Yeah. Well certainly one of the most significant assets in a business owner's estate is of course their business, which is usually highly appreciating. One of the tried and true estate planning techniques is to get an appreciating asset out of your estate. To do that, you often have to make a gift of an asset while it's at a lower value, with the understanding that as it grows, all that growth is going to escape estate tax. Certain types of trusts can actually accept business interests. With a C-Corp structure partnership, you can gift some of these appreciating and get all of that growth out of your estate. And that works particularly well with a charitable remainder trust.
Brendan Freeman:
So I'm guessing as our business owners and individuals are considering these types of vehicles, the best thing to do would be to talk with our group within the private wealth team, as well as maybe with your accountant or your CPA, that kind of thing.
Cymbre Van Fossen:
Yes. One of my favorite things to do is partner with the trusted advisors that our clients have, so their attorneys, their CPAs. I think you really do need a good team in place because you're looking at a number of different factors. Of course, you're doing tax planning. Again, that's one of the benefits of a trust is that it allows you to do tax planning in addition to satisfying your charitable desires and benefit those charities. So we want to be working with the CPA. We also want to be working with the attorney because they'll have the best sense of what the overall estate plan is for that individual. They'll know not only about those business assets, but about all the different moving parts in that family's estate plan and their legacy planning.
Cymbre Van Fossen:
Then you do want to have an experienced trust advisor, portfolio manager who's part of that conversation. That's where we come in, because you need to understand what is the growth going to be on those invested assets. How exactly are we going to take assets, whether they're business assets or other low basis assets that have been funded into those trust, and then sell those potentially over time or in a lump sum and grow those? So you do want to understand that discussion as well. Then oftentimes you want to have an experienced corporate trustee. And again, that is a role that we can play. Most people want to have a third party corporate trustee to really handle the complexities of a charitable lead or a charitable remainder trust. Again, an attorney is going to advise you as to your options in having a trustee, but there are complexities, and certainly getting it right is very important.
Brendan Freeman:
Getting it right. At the end of the day, you've got families that are set to benefit here, as well as you've got charities, and that's high impact work that we're doing. That's something that our group does all the time. Can you make this really real for our listeners, and maybe give us an example or two of how this might play out in real life?
Cymbre Van Fossen:
Yeah. We work with a lot of different business owners who are at different stages in terms of either growing their company, or frequently they're looking to sell or have recently sold their company. One example I could share of a charitable lead trust is with a business owner who recently sold his company. Oftentimes, we recommend to our clients, please come to us before you make that decision to sell. We can be helpful in having discussions about structuring the sale in terms of the tax implications and so on. But realistically, people do come to us after the fact and then say, "Well, what can I do from a planning standpoint? I'm going to have a significant income tax event in this year. I just sold my company." Well, one to technique that works well is to create a charitable lead trust. If you structure it from a tax standpoint as a grantor trust, that means that you can get a current income tax deduction, and it can be a very large income tax deduction that can offset oftentimes most or all of those gains.
Cymbre Van Fossen:
Again, as we spoke about initially, a charitable lead trust is going to be paying that charity or charities of your choice a stream of income for a period of years, say 10 years. So you've chosen a charity. They're going to be getting several thousand every year for 10 years. And at the end of that period, whatever's left in that charitable lead trust is going to come back to you. So effectively you have offset all of the gains from the sale of your company, or most of them. You've benefited a charity that you really believe in for a decade. And it's wonderful to see those charitable gifts occur during your lifetime when you can enjoy them. And finally, you're getting back usually what you put in, because the growth, as effectively managed by our investment team, has been such that it makes up for that stream of income. So it's been sufficient to cover the income going out to the charities and then leave a significant residue coming back to the original grantors or their family.
Cymbre Van Fossen:
So I've seen that with a couple of clients, and it's a nice technique in a low interest rate environment, again, where people are charitably inclined. You are giving away part of that growth to the charities upfront, but where you want to offset significant capital gains. The reality of the benefits of a trust certainly come into play when you start looking at real numbers for real clients, and you see somebody be able to essentially erase 500,000, a million dollars of cap gains in a single year and still benefit the charities that they believe in. It's really a powerful thing to see and be a part of.
Brendan Freeman:
That is a powerful thing. I've been in those situations with you and with others, where we sit down and talk to clients and we see it on paper and it's meaningful. So as I said, it's kind of a win, win, win across the board. And I agree with you. You mentioned early on that the best time to do the planning is early on and not necessarily after the sale, even though we're happy to talk after the sale, but oftentimes it's very beneficial to do it on the front end. So our last question here, where do we go from here? Any other thoughts or considerations, Cymbre, that we should be thinking about in terms of our listeners here?
Cymbre Van Fossen:
Yeah. Well, I love to help people who are charitably inclined. I think it's exciting when you have significant wealth and you can think beyond just the immediate needs of your family to what is your legacy? What are you going to be leaving even beyond the next generation of children and grandchildren? And certainly charitable trusts are a way to extend the legacy that you've built in your company to then benefit charities really in perpetuity. And because there is significant wealth in these companies, you can do this in a way that doesn't disinherit children. It simply structures things in a way to provide that benefit to charities, get a nice tax benefit, and again, still help out your family. We're here to help and to help you think through that, again, to really run real numbers and help you understand what the planning process is going to mean for your family and your business.
Brendan Freeman:
Well, wonderful insight. I want to thank Cymbre Van Fossen for participating in this important discussion today. I also want to thank our audience members for listening today. I'd encourage you to look at firstbusiness.bank to check out other resources that we offer for business owners, for investors, for charitably minded individuals, including a related article that we have that talks about the implications of year end giving at the current moment. So please check that out, but we invite you to experience the advantage of First Business Bank. If there's any way that we can help, please let us know.
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