A client was working with a Schwab financial consultant out of the K Street Branch in Washington, D.C. The client, who was on the cusp of retirement, was facing a raft of complicated financial considerations: He had just taken his commercial-mortgage business public and needed help managing his (now considerable) assets, minimizing his estate and income taxes, and giving to charity.
The financial consultant put in a call to Damian Shaw, an investment officer at the Charles Schwab Trust Company, to see if a trust might make sense for this client. Seeing that an off-the-shelf solution was out of the question, Damian embarked on a fact-finding mission, talking in depth with the client, his Schwab financial consultant and his attorney.
“As it turned out, the bulk of this gentleman’s wealth was concentrated in thinly traded stock in his mortgage company,” Damian recalls. “He was eager to diversify but sensitive about potentially flooding the market with his shares and thus diluting the value of the stock.”
In the end, the client created a charitable remainder trust (CRT), a type of personal trust designed to reduce estate and income taxes and create current income for the grantor (the creator of the trust) or another individual, while leaving the remaining assets to charity. If the assets in the trust grow, it can increase the income stream, but if they decline, the income stream may be reduced.
“The client wanted to make sure his assets were positioned for potential growth—for two reasons,” Damian says. “Appreciation would increase his income stream during his lifetime—and also extend the reach of his charitable giving after his death.”
Trusts are rarely turn-key, but with some effort they can yield tailor-made results. “We want our clients to be able to tick off every box they have,” Damian says.
There are two basic types of trusts: revocable and irrevocable. A revocable, or living, trust can be changed or dissolved at any time and allows the grantor to control its assets (which are considered the grantor’s for tax purposes). With an irrevocable trust (like a CRT), on the other hand, the grantor loses legal ownership and control of trust property, and a trustee then controls the assets on behalf of the trust’s beneficiaries. An irrevocable trust, unlike a revocable trust, is a separately taxable entity.
“Many people think trusts are only for the very rich or elderly, or that they’re too complicated or not specific enough for their needs,” Damian says. “But there are a number of variations that can be beneficial to those seeking to reduce estate and income taxes while effectively directing their wealth to the right beneficiaries. And clients are often pleasantly surprised by how easy they are to set up.”
What You Can Do Next
- To discuss your needs with a personal trust expert, call Charles Schwab Trust Company at 877-862-4304.