WCI #478: How Doctors Can Give More and Pay Less in Taxes

A

This is the White Coat Investor Podcast where we help those who wear the white coat get a fair shake on Wall Street. We've been helping doctors and other high income professionals stop doing dumb things with their money since 2011.

B

This is White Coat Investor episode number 478. This episode is brought to you by KeyBank. For six years, White Coat member benefit partner Laurel Road has been part of KeyBank since March. That partnership becomes even stronger as Laurel Road is now officially under the KeyBank brand. With the transition to KeyBank, the same tools and services you rely on now come with enhanced resources and support and the same great experience you trust. White Coat Investors can continue to enjoy the benefits and financial resources they always have with even more support from KeyBank. To learn more and for terms and conditions, please visit whitecoatinvestor.com KeyBank welcome back to the podcast. We've got a great episode planned for you today. We're bringing back a White Coat Investor conference, the Physician Wellness and Financial Literacy Conference speaker, to get even more in depth on one of the topics he presented on at the conference. And I feel a little bit guilty. I've been underselling this conference for years. It's awesome. It's awesome. I should be begging you to come to the conference. It's a life changing experience for so many people. You actually get to meet your tribe. You know, you're sitting next to people, one of whom has, you know, $300,000 in student loans, one of whom's a DECA millionaire. Both of them will talk to you about anything financial that you want to talk about. And that's just not the case for most of us in our lives. We can't talk to our neighbors about it. We can't talk to our family and friends and, you know, even our colleagues. There's this taboo in medicine that keeps us from talking about money. You can do that at the conference and it's so inspiring, not only in the financial content, but the wellness content. We get to do all the fun wellness activities, so if you just want to come and have a relaxing time, you can do that and take the content home with you to digest it all at home. But just the content itself is incredibly valuable given your income and the level of wealth. If you manage that income well, you're likely to have the value on just the content is immense. And so we actually will just package up just the content if you want. We call that our continuing financial education course every year. So this year we sell CFE 2026 and it's basically the content from the conference. And like all of our online courses, it's totally risk free to buy. We'll give you a week to see if you really want it. If you don't, we'll give you all your money back, no questions asked. As long as you haven't watched the whole thing, right? We actually check and make sure you haven't watched more than 20% of before we give your money back, but we'll give you all your money back. You can look through it and see what you like and watch one or two and say, oh, yeah, there's a lot of value here. For me, this makes sense. But the beautiful thing about that CFE online course, not only can you digest it on your own time, you can listen to a podcast style in your car from your iPhone, but it's dramatically cheaper, right? I mean, not only do we charge less for it than we do for the conference attendance because we don't have to feed you a bunch of expensive hotel food while you're there, but you don't have to pay for the Ubers, you don't have to pay for the airplane ticket, you don't have to pay for the rooms, and perhaps most significantly, you don't have to take any time off work, right? You come to WC Icon, you're probably missing a few days of work and there's some opportunity costs there. It's probably the most expensive part of coming to the conference. You don't have to do that with the CFE course. So you can go to whitecoatinvestor.com courses and check that out. But all that to say I'm bringing on one of our speakers from the conference and from this course, right? Same thing. Just to give you kind of a sense of the quality of the presentations, the quality of the content that's being presented at this conference. I mean, we're turning down 8 or 9 out of 10 of the people applying to speak at the conference. We're getting the best of the best, right? And you'll get a sense of that from our interviewee today. But I think it's going to be a great discussion. We're going to talk about charitable trusts, which is a topic that's become more interesting to me as of late. The last time I wrote something about it was about a decade ago, but I wanted to really dive deep on it today, so I'm going to apologize in advance. We are going to hit the 101 level of this topic for sure, but pretty rapidly we're going to be jumping to 401 or maybe 601 on this topic and really diving into the details of how a charitable trust works and who might want to use one. Before we do that, though, I wanted to cover a couple of things. One's our quote of the day, and we're going to get one from Tony Robbins today who said, it's not what you get, but who we become and what we contribute that gives meaning to our lives. And I think that's a great quote, because at the end of the day, once you have enough money, life isn't about money. Money becomes irrelevant in your life, and that's where I want you to be so you can concentrate on what really matters in life. And for many of you, you do that every day. You concentrate most of the day on what really matters in life. And, you know, it's a hard job. It's often a thankless job. No one said, thank you. Thank you for what you do today. You know, I had a couple of shifts earlier this week, one of which I had to really hustle on. Saw a lot of patients, and most of whom were having one of the worst days of their lives. Right? And whether you're just suturing up a laceration or admitting somebody to the hospital or trying to dive through a complicated medical history to figure out what's going on, you know, it's a day they remember and it's significant. The other thing I wanted to tell you before we get into the interview is that we are having a summer sale. The code is Summer20. That gives you a 20% off everything, right? And so we're selling stuff at the WCI store, We're selling our online courses, probably most significantly. Right. Like I mentioned, that CFE 2026 course is 20% off right now. That ends tonight. Right. The day this podcast is dropping. It's been going on for the last few days, last week or whatever, but it ends tonight. So if you're listening to this, the day it drops and you want to pick up CFE 2026, or you want to pick up our no hype real estate investing course, or you still need a written investing plan, a written financial plan, and you want to take our fire your financial advisor course, the student resident attending, or the version that's good for CME credit, all of that 20% off if you go buy it today, you go to whitecoininvestor.com courses, or if you just want some swag, you just want 20% off a T shirt or a mug or whatever, you can go to whiteconinvestor.com store buy our books at the store as well. It's pretty awesome to be able to offer that. It's obviously this podcast, we're recording it quite a while ago, but it's dropping the first week of July. And we all know that the first week of July is a big day, big week, big time. Period change. It's basically a new year for doctors, particularly those in the training pipeline. Right. You move from a second year medical student to a third year medical student the first week of July. You move from a third year resident to a fourth year resident, or you leave residency and start fellowship, or you come out of training. You know, the first week of July is a big date for doctors. And now that's usually a great time to revisit your financial plan or to create one. And so summer 20 is the code. Go to whitecodeinvestor.com courses or whitecodeinvestor.com store to pick that stuff up. Okay, enough introductory material. Let's get into this interview. Let's get Matt on the line here. My guest today on the White Coat Investor podcast is family practitioner and WCI Con speaker, Matt Moore. Matt, welcome to the podcast.

C

Thank you so much. It's an honor to be here.

B

So, just by way of introduction, tell the podcast audience a little bit about yourself and then I'll explain why we're together doing this podcast. But introduce yourself a little bit, you know, your background and how you got interested in finance and so on, and bring them up to speed on who you are. Sure.

C

So I'm a family medicine physician in the Midwest working for a hospital group, a multispecialty hospital group. I got interested in personal finance. I had a grandfather who was an accountant and he had three very successful son in laws who of course were married to wonderful daughters. And unfortunately all of them made some pretty stupid decisions with money. And my mom would occasionally mention that fact to me and that encouraged me to try to make sure I was learning about personal finances so I did not make the same mistakes that my uncles did and make it so that more financial security for me and my family.

B

Just by way of introduction to the audience of how we ended up having this conversation. Matt spoke this year at wcicon, which is actually a surprisingly competitive place to speak at. I think we probably reject something between 80 and 90% of the talks submitted for the conference, not because we want to reject them, but just because we only have space for so much. Even when you include some of the presentations that are only done virtually and Matt's presentation was something we hadn't done a lot of at the conference. In fact, well, I've written about it a fair amount on the blog. We don't get a lot of guest posts about it and we haven't touched on it a lot in the podcast, which is charity. And it was clear that he understood it and that this was going to be an in depth level talk. And so we took him for the conference. And at the conference I try to drop into every presentation. So that means I don't watch the entire presentation unless it's one of the keynotes. For the most part, I catch 15 minutes here, 20 minutes there, and if I get intercepted between the rooms, I may not ever make it to the next one. I end up chatting with somebody in the hall about whatever. But I walked into Matt's talk right when he was talking about charitable trusts and realized it's been 12 years since we did anything with charitable trusts. At White Coat Investor. That was a blog post about 12 years ago. It was probably written even before then. So I realized that he understood this even better than I did and that very few people really spend a lot of time talking about or thinking about charitable trusts. And so I want to do an episode about charitable trust. But before we get there, we probably ought to just talk briefly about charity in general. How the tax treatment of charity is, how it changed this last year. You know, that big bill that went through Congress, that big beautiful bill that went through Congress last July, made a few changes with charity. Why don't we start by just mentioning those and how the charitable tax landscape has changed in the last year.

C

Sure. So I would say first off, I think charity is one of the highest and best uses of your money that you can use it for. It can bring a lot of benefit to a lot of people beyond yourself and bring a lot of non financial benefits to yourself as well, which probably can make up its own podcast. But in regards to the financial benefits that it can bring to you, the biggest one is generally the tax deductions that you can get for making charitable contributions. And under the one big Beautiful Bill act, there has been some adjustments made to the contribution, sorry, the benefits you can get from those contributions. Specifically, there are two. The first is there is now a hurdle that you have to get over in order to be able to take chair charitable deduction. And that is 1/2 of 1% of your adjusted gross income.

B

It seems like such a small number, Matt. It seems so small. It's only 0.5%. Right.

C

It seems like it, yeah. And if you it does eat into the benefit a little bit, and for most people it's not going to make a huge difference. But if you had an adjusted gross income of $500,000, that means the first $2,500 that you donate to charity basically is gratis. You don't get any benefit for that whatsoever. Every dollar after that, you do be able to write off on your taxes, but the first 2,500 is basically free if you are itemizing your deductions. Taking the standard deductions is a completely different game.

B

The thing I hate about this change is it discourages people from getting started with small donations. Right. Like you mentioned, a physician family making 500,000, it's 2,500. Or if the family's making a million dollars, it's $5,000. So there's no tax benefit at all for the first five. So if you only give five, no tax benefit. If you give 10, half your tax benefit's gone. If you give 15,000, you know, a third of it's gone. That makes, you know, if somebody's a big giver. Right. If they tithe, for instance. Right. That million dollar household gives $100,000 a year. Okay, well that's not that bad. You still get to deduct 95,000 of it. That's maybe not as big a deal. But if you're just kind of going, maybe I should give some money to charity, and then you find out you get no benefit for the small amount you gave, I think that is discouraging to people to get started, don't you think?

C

It absolutely is. And there are some ways around that. So if you took the standard deduction, they did write into the law this year that if you're single you can donate up to $1,000 and if you're married, filing generally up to $2,000 as an above the line deduction with the standard deduction, and you can actually write that off on your charity, sorry, off on your taxes. In addition, if you are donating significant amounts each year, but you're never actually coming over that standard deduction, you can several years of giving into one year, take the major tax deduction that year and then take the standard deduction the following years and can augment the write off you get from doing that. But that would be more in the standard deduction realm that we've talked about for that.

B

Yeah, I think there's some debate as to whether to call that the non itemized charitable deduction. Whether that's above the line or below the line. But it's certainly not Schedule A. It's not an itemized deduction. Okay, let's talk about the other change that, the other big change to charitable giving that happened last year.

C

Well, the other big change is they did cap the benefit that you can receive when you make large charitable deductions if you are making a large amount of money. So if you are in the 37% tax bracket, you can no longer write off 37% of every dollar you donate. They have capped that at 35%. So it's a very small change that's there and really shouldn't discourage anybody from giving. But at the same time, it's just a bit of an annoyance that you have to calculate that and you're not getting the full benefit despite the fact that you're making a generous contribution.

B

Yeah. So you add those two together. Again, let's talk about that million dollar, you know, family income. Let's say they decided to give, you know, decided to give $100,000 away to charity. Well, in the past they would have been able to get $37,000 off their federal taxes. Right. And so that's great. But now they're going to get no more than 35,000 off their taxes minus another 5,000. So they're really getting three $30,000 off their taxes for giving that $100,000 instead of giving $37,000 off their taxes for getting that $100,000. It feels like a little, just kind of a little kick in the teeth to givers, though, right?

C

Yes, it does.

B

You think they did this just to try to raise a little bit of money they could use for other tax deductions in the bill elsewhere and still have it pencil out. You think that was the motivation behind her? Do you think someone was like, let's discourage giving? I mean, what was the, what was the thinking behind this in Congress?

C

I think that was possibly part of it. They did have to make things even out in the end. But I think also part of it was the way to try to write in for the people with the standard deduction so they could get an additional one or $2,000 off on their taxes when they're taking the standard deduction. But also the fact that the standard deduction was increased so much it had to be counterbalanced with us a little bit of more money coming in from other sources.

B

Yeah, that's true. That change does encourage small giving. You can still take the standard deduction. You still get your $800 that you gave away to charity, you can deduct that as well. So I suppose it works on both sides. It just ends up being a little bit more complex than it was before. I think that's probably the main change. And I'm not a big fan of increasing complexity of the tax code or personal finance in general, unfortunately. Okay, well, let's pivot a little bit. Let's talk about charitable trusts. And many wealthy people have a very hard time understanding charitable trusts. So let's start with the very basics. Right?

C

Yeah.

B

Let's go to people and their motivation. Right. What are some of the reasons why someone might consider a charitable trust instead of some other solution? You know, like just donating to charity with some of your money and buying an annuity with some of it.

C

Absolutely. So the, you know, I say the main reasons, obviously you are setting up a charitable trust to be able to give something to charity that's right in the name. So if you're setting up charitable trust, you have a charitable heart and you want to try to do some good in this world beyond just what you're doing as a family, the secondary benefits that you can get from it. So there's ways you can set up trust so that it is paying an income back to you or a beneficiary. There's a way to set up a charitable trust where you can basically defer taxes on a large event like selling a business. And there are ways to set up a charitable trust to pass assets to the next generation, estate and gift, tax free. Those are maybe the three major impetuses beyond the charitable giving to set up these kinds of trusts.

B

And I kind of alluded to this in that first question. But a charitable trust is what's known as a split interest gift. And I think it's really critical that you start out understanding what that is. So can you explain what the split interest gift is?

C

Yeah. So as I mentioned, you know, when you're setting up the trust, it has a charity is the heart of that. So you're going to be giving money to charity, but there's that secondary benefit to you, whether that be income or to you or a family member, or it can be an inheritance. And so the trust basically has a split interest. It is helping out the charity and it's looking out for the person you put as the beneficiary of that trust,

B

which could be you.

C

It could be you. Yes. And any decisions made in that trust need to be done basically for the benefit of both. You can't just willy nilly make any decisions in that trust. So it's very important that when it's set up, it's set up in a fashion that accounts for the needs that are going to be happening for you and or the charity going forward.

B

All right. As I mentioned in the beginning, the last time I wrote anything about charitable trust was more than a decade ago. I think we published it in 2015. Back then, WCI was just me and one part time employee. I titled that post Kratts, Kruts, Klats and Klutz, which are the acronyms for these trusts. They're Charitable Remainder Annuity Trust, Charitable Remainder unitrust, Charitable lead Annuity Trusts, and Charitable LEED unitrusts. And I think we probably need to define these terms a little bit before we get too deep into this discussion. The first distinction is between an annuity trust and a unitrust. Can you explain the difference between those two?

C

Yeah. So an annuity trust is basically exactly as it sounds, just as if you purchased an annuity, the trust is going to pay you a certain amount, the same amount every single year or quarter, however you set it up, until the end of that trust. So it's the exact same amount every single time. If you were to set up a unit trust, a unit trust instead pays you a percentage of the assets within that trust. And so that allows for more variability as the trust hopefully grows in assets, maybe along with the cost of living, then the amount that it would pay out would be matching the increase in the amount of assets. And that allows you to be withdrawing more, whether to you or to the charity, depending on how that's set up.

B

Yeah. So you're taking on a little more risk with a unit trust than an

C

annuity trust typically depends on where you're putting the risk. If it's an annuity trust and things go down, you're getting the money, but what's left over at the end, the risk is going to that party instead.

B

Fair point. Okay. The other distinction is between a remainder trust and a lead trust. Can you explain the difference between those two?

C

Yeah. So when you set up the trust, what's left at the end is the remainder. And so if it's a charitable remainder trust, what's left at the end of that trust? The remainder goes to the charity. We also talked about the income being thrown off by the trust during its life. That income that's being paid out is called the lead. And so in a charitable lead trust, sorry, a charitable remainder trust, the remainder goes to the charity, but that lead, the income that's produced or the set amount of the annuity or the unit trust portion goes to you or a beneficiary. If you have a charitable lead trust set up, it's the exact opposite. You're basically paying the charity first with the income that's coming off of that lead, and the remainder ends up going to your heirs or beneficiaries.

B

Now, one of the first things I often have to disabuse people of when they start learning about charity and the tax benefits with charity is the idea that you come out ahead by giving to charity. And for the most part, when you give to charity, you're not coming out ahead. It really is a gift. You're giving the money away. You know, you give 100,000 to charity, and you used to get, you know, $37,000 off your taxes. Now you get $30,000 off your taxes, but you're not coming out ahead, you're coming out $70,000 behind. Is that always the case when it comes to charitable trusts, or is it possible to actually come out ahead?

C

So if you're just looking at a fairly short timeline, I think that the best you can get it financially back to yourself out of a Trust might be 50%, but I'm including in that the lack of paying capital gains taxes. Assuming you put in appreciated assets over a long period of time, because the assets are growing, depending on. Well, hopefully growing depending on the growth of those assets, if you have it over a long enough period of time, it could pay out the amount that you put in there or more. But it depends on how the trust is set up. That being said, you have to factor inflation in, and there is that risk of the assets. The investments you choose would not be growing, and it could actually be decreasing. So it is technically possible, but very unlikely.

B

Okay. And certainly especially if you include the time value of money. Right. You might actually get more back nominally, but you had your money not being used for something else for 20 years or some opportunity cost. All right, can you talk a little bit about how the tax deduction is calculated or how you determine how much that is when you do a charitable trust?

C

Sure. So depending on the trust you set up, let's start with a remainder trust. When you set up that trust, you basically are setting it up so that you use the interest rate that the IRS determines at the time you set up that trust, and that is the assumed amount over the life of that trust that the assets are going to grow at. And so if you have a charitable remainder trust, if you have a high interest rate environment, with that, then the IRS is going to assume that the assets you put in grew faster and that therefore there will be more left at the end to be given to charity. And then let's say it was a 10 year remainder trust. The amount that's left over to charity at the end of 10 years is calculated using the IRS's rates. And then you get the present value of that amount in today's dollars that you get to write off on your taxes. And if that's a very large amount, you can actually carry that forward over several years to take the full benefit of that amount for a total of up to five years.

B

All right, I think we've covered the basics. Now let's go from a 101 class on charitable trust. Let's go now to the 201 or 301 or 401. So let's talk about specific strategies somebody might use a charitable trust for. Maybe we start like you did in your presentation with charitable remainder trusts, and let's talk about them more specifically and when somebody might want to use one and what the considerations would be when doing so.

C

Sure. So a charitable remainder trust. The goal of a charitable remainder trust, obviously is to leave something to charity with that. But at the same time, that lead comes back to you or a loved one that you can set up to help look out for their income. So usually what people will do is they'll take a highly appreciated asset and donate it into a trust. In doing so, you have made a significant charitable gift, which is wonderful. And because you made a significant charitable gift, you do get a significant tax deduction. And the present value of that, in addition to that, because that is throwing off money every single year, you can take the asset you put in there, sell that asset, and when you sell it, the charitable remainder trust, anything that happens within that trust is tax deferred. So if you sell something that's highly appreciated, the capital gains taxes are not owed until any money is distributed. So you basically protected any taxable events in that trust, and then you can redistribute that and purchase other things so that it is more diversified and then that new things that you purchase, the new assets you purchased can provide you an income through the life of the trust, which could be the rest of your natural life or designated term. In addition to that, you avoided the capital gains tax that you would have had if you had to sell these assets. And you were able to reduce or completely eliminate your estate taxes by putting the assets into the charitable trust.

B

Wow, that's a lot of benefits.

C

That's a lot of good things to happen.

B

Let's talk about a situation, right? I mean, you're going to sell a business you built, you know, you're going to sell white coat investor, right? You're going to sell this medical practice that you built up. And then you look at, wow, if I sell this, you know, and I live in, say you live in California or something, right? And you're gonna end up paying 23.8% plus California state tax. It might be 30% plus of the value if you just sell that business. So instead you say, well, I'm a pretty charitable person, I certainly don't need all the value of this business. Why don't we put it in a charitable trust before the business gets sold? And so you put it into a charitable trust, you get a huge one time charitable deduction, right? Because you're putting this business in there and whatever the remainder is going to be, whether that's a third or 50% of it, that's charitable deduction you get for that year. I mean, that's a huge charitable deduction. And then you decide to sell the business once it's in the trust and you don't have to pay that capital gains tax that year. The trust doesn't pay that capital gains tax. And so you've accomplished your goal of getting the business sold. You're out of the business now and you haven't had to pay any taxes really. In fact, you got a huge tax break when you're going to sell your business. And it's not like you're not getting to get any benefit personally from selling the business because now you've basically locked in an income for 10 years or the rest of your life or however you wanted to set it up. I can see why that would be very attractive to somebody with an appreciated business with a charitable bent in their body. What other uses might somebody find for a charitable remainder trust?

C

Just briefly, you did bring up a very good point, is that you decided to sell the business, you put the business into the trust first and then sold it. That's incredibly important because if you were to sign the paperwork to sell the trust before you put it into the trust, the IRS will say that that's not fair dealing and they will cancel the trust. So you need to make sure you put everything into the trust before ink hits paper or selling something, or else it will not work.

B

Obviously you got to get it in there first before you can sell it. It's a fair point. Who else would want a Charitable remainder trust. Besides somebody with this appreciated asset, whether it's a business or some other type of investment that they're just trying to delay or avoid taxation on, who else would consider a remainder trust like that?

C

So another group that would benefit from that is if you have heirs that you would like to help support their income in some way. So when money is paid out by the trust, you can set it up so that it doesn't necessarily come back to you, but it can come to your heirs. The more advanced way of thinking about that would be if you set up a testamentary charitable remainder trust. So at the moment you die, a charitable remainder trust is created. And then you can make that charitable remainder trust the beneficiary of your traditional ira. Now, as we talked about, as you've talked about before, the traditional IRA, when you inherit that, you have 10 years to take it out. And everything that comes out of there is taxed at ordinary income tax rates. But if you have this put into a charitable remainder trust, you can have that be paid out over the expected life of the beneficiary that you have set up. So it can go way beyond the 10 year timeline where you're helping support somebody's income. And so you get to sort of sidestep that limitation of a traditional IRA while still giving to a charitable goals.

B

Yeah, so it's, you know, it could be a form of a spendthrift trust. Essentially you got a kid or you got a, you know, maybe you're supporting a parent or a disabled child or whatever, you could lock in an income for them for a decade or for life and yet still, you know, basically control where the assets go once that need is taken care of. I can see why that might be more attractive to somebody than putting some of their money into a spendthrift trust and then just giving the rest to charity at their death. This combination would allow you to be sure you could support them and yet still give to the charity at the end once that needs taken care of. I can see why that would be attractive to somebody.

C

Another person who may benefit from this would be somebody who wants to make a charitable contribution, but. And they want to get that tax write off now and set this whole thing up. But they don't really know where they want that charitable contribution to go yet. Because you can actually set the charitable contributions to be giving to your own donor advised fund for which you can later decide what to grant that the money's out to.

B

Yeah, you do have to decide who the charity is going to be when you set up the trust though, it's just that the charity could be the daf.

C

Correct.

B

That's a pretty slick trick, actually. I like that. Okay, so I mean, with this remainder trust, there's still an income coming out to somebody, right? Whether that's you, whether that's, you know, your heir, your disabled child, whatever that income's coming out. Can you talk a little bit about how that gets taxed?

C

So when the trust is generating income, there is a tiered system as to which it has to distribute that income that comes in. So to whomever beneficiary it is giving the money to, it first has to distribute any ordinary income that it creates. And the person who accepts who is receiving that money, it gets taxed on that income at their tax rates. So if they have an ordinary income of a tax rate of 37%, they would get taxed at that. If it's 10%, they get taxed at that. So it basically folds into their ordinary income for tax purposes. Once all of the ordinary income is spent, then it has to start paying out any capital gains that it produced, assuming there's still an obligation there to pay money out. And then the person would have to pay their capital gains rate of the beneficiary. And then if there is still obligation to pay out money, then it would pay out any tax free money that may have come from tax free bonds or the like. And finally, if there is still a requirement to pay out money, then it has to eat into the corpus or the principal that money you put in initially in order to fulfill its obligations. And that would be tax free as well.

B

So a pretty good chunk of it though is going to be taxed at ordinary income. And who pays that tax? The beneficiary?

C

Yes, the beneficiary has to pay the tax on that income. It's similar to like coming out of a traditional IRA that you would have to pay the ordinary income on any income that comes from the trust.

B

But that split is determined by the income generated by the assets in the trust, right?

C

Correct.

B

And so if you only invest the trust in very tax efficient investments, let's say it's all in VTI, the yield on that's just over 1% right now, and it's basically all qualified dividends, then presumably the beneficiary wouldn't be paying ordinary income tax rates on that income, correct?

C

Correct. Yeah. It would pay very little ordinary income tax, if any, and then they would just be paying capital gains on what the VTI throws off. And then what needs to be sold in order to fulfill the obligation.

B

Yeah. Whereas especially if they're in the 0% long term capital gains bracket, it could be awfully tax efficient way to support them. So that's interesting. Okay, so I mean, you got to have a trustee managing these investments in some way. Right. Can that be you? Can you be the trustee for this charitable remainder?

C

You can be the trustee. This does require some knowledge and effort and definitely organizational skills to be able to do it. You know, when I sort of explain a charitable remainder trust, I sort of think this as a, you know, an undergrad level type of thing. Now it takes effort, it takes brains, it takes attention to detail. But it is technically possible to do it. Or you can choose someone else to do that for you like a financial institution. If you do that, of course you do have to pay them for the work that they do.

B

Yeah. And in general, it's actually pretty hard to find somebody that will do that for less than, than 1% Aum. I know of a trust management company that's doing it for more like 0.6%. But you're not going to get this for 20 basis points. I don't think any better.

C

And if you want that 0.6, you're probably going to have to make us a very significant contribution to the charitable remainder trust.

B

Yeah, exactly. Okay. Yeah. The bigger it is, obviously the lower the AUM fee can be. And, and they still feel like they're being compensated fairly for managing it. Okay, Well, I think we've covered a remainder trust and who might want to use that pretty well. We talked about how it can be a testamentary remainder trust. It can really help with an IRA getting more than a 10 year stretch out of an IRA, essentially. Maybe we have to talk about the downsides. Right. This all sounds like rainbows and unicorns and ice cream so far.

C

Right.

B

Let's talk about the downsides. We talked about the fees. This is not like reversible either. People need to understand.

C

No, it's an irrevocable trust. When the money goes in, it's in. You don't get it back.

B

Yeah, it's irrevocable. What are the other downsides you would think about?

C

Well, as we mentioned earlier, there's the investment risk. So if for some reason you invest in something or the US economy tends to go down significantly, that's going to either decrease the income of the beneficiaries, the amount that eventually goes to charity, or both. So there is that risk associated with that. I mean, this is not necessarily a risk, but Obviously, a downside is that when the money is thrown off to beneficiaries or get taxed on that, and so it's not a free lunch from that standpoint. The administrative cost and complexity, I mean, it's going to probably take you 20 hours in a year to manage this thing on your own if you're going to be trying to do it yourself. And that's assuming that you've found your groove and you know exactly what you're doing. So there is some benefit to paying someone else the potential to do that. And then you do have a fiduciary responsibility like we talked about with being a split interest. You can't just be making decisions on your own. It has to be for about the beneficiary benefit of the beneficiaries and the charity. And so making changes to this trust is pretty hard.

B

I mean, you're going to have to file a trust tax return. Most of us haven't done that. A lot of us have done our own taxes. You don't fire up TurboTax and crank out a trust tax return. People should be aware of that. Okay, you're going to have to hire somebody to set this thing up too, right? I mean, generally you're hiring an attorney and paying them thousands to set this

C

up and probably getting a trust, sorry, getting a CPA to make sure you're making a good decision in terms of how it's set up. And there's the K1s and I think there's a Form 5227 that's along with that. Like you mentioned, there's attorney. And then the investment costs don't go away because you have this. There's still the financial fees along with this as well.

B

Yeah. Okay, so it doesn't make sense to do this with 20 grand. Right? I mean, the cost, the hassle, the fees are going to eat up any benefit. How much money do you think somebody ought to be putting into a charitable remainder trust before this is, you know, quote unquote worth it?

C

Probably a half a million dollars. If you're going to be doing less than a half a million dollars, you could consider just doing a charitable annuity where the charity just pays you directly and they get to keep the money at the end. It is a lot simpler, but it's less flexible in terms of what you can do with it.

B

Half a million. Okay, let's turn the page and let's talk about lead trusts. Right? Charitable lead trust, the classic charity now family later trust. And let's get into the details of when you might want to use this, what some of the strategies are for using a lead trust.

C

Yeah, so the two main strategies people would use this for is using it as an immediate tax deduction for a large taxable event like selling a business or decide to sell a bunch of bitcoin that if assuming that had gone up like it had several months ago, but basically a large taxable event.

B

Bitcoin you bought in 2011. Right, Bitcoin you bought in 2011.

C

So you're basically trying to take that tax hit and get a deduction and spread the taxable event out over several years to limit it in that one year and maybe absorb it and lower it tax years. The other main benefit of certain types of the lead trusts are as a estate planning. So trying to pass assets onto the next generation and trying to avoid estate tax.

B

Explain how that sort of how you set that up to avoid estate taxes.

C

So, yeah, so in terms of trying to set up to avoid estate taxes, when you set the charitable lead trust up, what happens is you set up a certain amount of money and then you decide you're going to be giving a certain amount to charity every single year. So the amount that's left at the end, that is calculated right when you set up the trust. The amount that's left at the end, that is a taxable charitable. Sorry, that's a taxable estate tax gift to your beneficiaries. But if you set up the whatever you spin off as income throughout the life of the lead trust, that part goes to charity and you get to discount that amount by the amount you give off to charity based on the present value of how much you give to charity each year. And so you can add that up. So just as an example, if you have an assumed 2 or 3% interest rate by the IRS, if your portfolio overcomes that 2 or 3% interest rate, then anything that's made above and beyond that 2 or 3%, the IRS basically turns a blind eye to it because it only cares what it looks like when it's set up. And so if there's money left over at the end of the trust, then all of that money gets distributed to your heirs tax free. This is called the zeroed out charitable lead trust.

B

That's estate tax free. That's not income tax free though, is it?

C

Yeah, it goes entirely free, is my understanding, to your heirs.

B

Wow, that's pretty awesome. And particularly beneficial if you fund it at a time of low interest rates.

C

Yes. Yeah. The higher the interest, this type of Trust really benefits from low interest rates, whereas the charitable remainder trust benefits from high interest rates for that present value deduction you're going to get for the remainder that goes to charity.

B

Yeah, very cool. So this would be a great way, especially if you were willing to invest it relatively aggressively and for a relatively long period of time. You did it for 20 years, right? 20 years. If you're arbitraging essentially the 8% or whatever you made out of this trust versus the 2% that the IRS thinks is going to the charity, 6% on that amount of money is a good chunk of money you can leave to heirs tax free, which is pretty awesome. Yeah.

C

I think I did a calculation at one point where I looked if you did a 10 year trust where you put $50,500,000,000 in there, assuming today's rates, which I think is 4.6%, and assuming that it made 10% and it was a zeroed out trust, over the life of the trust, the charities would have gotten roug roughly $60 million. And the amount that would have gone estate tax free to your heirs would be around $30 million at the end of that 10 years.

B

Not insignificant. And that's a zeroed out one. There's all kinds of flexibility in how you set these up. You don't have to go for the maximum deduction up front. You could have a smaller amount going to the charity as well. Correct. And then that would pass more to your heirs and you could change it so that 30 million ends up going to the charity and 60 million ends your heirs or whatever it might end up being. You just wouldn't get as big of a charity deduction upfront.

C

Yeah, you wouldn't get much big of a charity deduction upfront. And as long as the amount that goes to your heirs is less than the estate tax limit. So that may also go to your heirs relatively tax free.

B

Yeah, yeah. So you're really balancing a lot of things there. You're balancing interest rates, you're balancing how much of an exemption you're going to have left, you're balancing your desire to be charitable versus leave money to your heirs and then you let it cook for a While, you know, 10 years, 20 years, the rest of your life, whatever the term you pick, and then see what comes out the other end. But it could be very advantageous and you can see why. Especially, you know, if you kind of ignored the time value of money and opportunity cost, you could end up leaving more to your heirs than you actually gave away initially. Given all the growth over the years.

C

Absolutely. Then the this complexity you're talking about. I mentioned the charitable remainder trust being more like an undergraduate level type of calculation. This tends to be much more like a PhD level. And you're probably going to need some significant help to make sure that you pull this off properly.

B

Yeah. Plus you've got to decide whether it's going to be an annuity trust or a unit trust as well.

C

Absolutely, yes.

B

Okay. Now, inside these trusts, the tax treatment is different as far as buying and selling, isn't it? I mean, in a lead trust, you can't perform tax exempt sales in the trust, right?

C

Correct. Everything that happens in a charitable remainder trust is tax free, but everything that happens within a charitable lead trust is a taxable event.

B

So this doesn't necessarily work to put your business in there and try to sell it tax free. That wouldn't work for a lead trust. That would be something you'd want to use a remainder trust for.

C

That would work better as a remainder trust. The benefit within a lead trust is if you do have a taxable event within a lead trust. Well, I guess taking a step back, there are a couple of different types of charitable lead trusts we can create by depending on which type you choose. This is beyond a charitable annuity trust, sorry, annuity, or a unit trust. If you choose a grantor or non grantor trust, those are two further designations that can affect how taxes are treated within those trusts and outside of those trusts.

B

Yeah, that is an additional complexity. We're now up to the 601 level, I think, for this discussion of charitable trust. All right, so when would one want to use a grantor charitable lead trust versus a non grantor charitable lead trust?

C

So a grantor charitable lead trust generally benefits somebody who has a large taxable event in a certain year, as you mentioned, like selling a business. This is a way to try to get a large tax write off in that year that you sell the business to help soften that impact and maybe even carry that forward a few more years. So for a grantor charitable lead trust, the grantor or the donor is considered to be the owner of that trust. So it gets all the taxable deductions from the present value of what you're leaving to charity. But you also have to pay all the future taxes, taxes that the trust creates at your taxable rates. So if you're in the 37% tax bracket, then you're going to be paying 37% on every ordinary income dollar that's created by that trust. And in addition to that, that money that's created every single year, remember, is not going back to you during that. That's the lead. That's a charitable lead trust. So you're giving that lead to the charity.

B

The charity's getting the money, but you're paying the taxes on it. So it's a little bit of the classic phantom income tax there.

C

Yeah, you got that huge income tax break at the very first year, which you can carry forward for up to five years. But yes, it hurts a little bit to pay taxes on income that you don't realize that goes towards the charity,

B

especially if you put a huge chunk of your net worth in there. Okay, how about the non grantor trust? When would you want to do that?

C

So with a non grantor trust, the donor is not considered the owner of that trust. The trust is considered the owner of itself. And so it actually pays all future taxes that are created when anything taxable happens within that trust. But it can, unlike you and I, it can pay off. Sorry, it gets an unlimited number of tax deductions. So if it creates, you know, if you have something that you put a million dollars in and it, it created $500,000 worth of income for some ridiculous reason, which would be wonderful. If it donates to charity, it can write off all $500,000 in that income where you and I could not. If it does not write off the income, though, it has incredibly tight tax brackets, much, much tighter than the individual or married types tax brackets. Just an example, I think it's around $15,500 of income. At that point, you're already taxed at 37%.

B

Yeah, you got to be careful with the trust tax brackets for sure. They accelerate very quickly. Okay, but this distinction doesn't exist for remainder trust. There's no grantor remainder trust. There's no non grantor remainder trust. This is just a lead trust thing, right?

C

Everything goes to the rate or goes to charity, so you don't have to worry about it.

B

Okay, so downsides of a lead trust.

C

So the downsides of lead trust would be, obviously it's irrevocable, just as the other trust is. There's the investment risk that you have put into it, the complexity.

B

Taxi.

C

The cost is significantly more. It's not tax exempt, as we've mentioned previously, specifically with the grantor lead trust. Remember, you put that money in and you took that tax deduction based upon the amount that was going to be given to charity over 5, 10, 20 years. Well, if you happen to die before the end of that trust, the trust ends. And that lead those last several years of LEED don't exist for the charity either. And that means the IRS is going to come back to your estate and say, hey, we need that money back from the present value that you took at the very beginning because the later payments are not being made.

B

Yeah. But for the most part, especially on the grantor side, it's really focused on reducing the taxes for the grantor. You're offsetting some sort of major taxable event, typically when you do this. Yeah.

C

And once that trust is over and done with that money, actually the remainder that comes back to the trustee comes back tax free. It's considered that you've paid taxes on it through what you've done with the charity and the tax you had to pay on the income. So that's one of the other benefits, is that you, when the money comes back, it does come back to you, you know, tax owed on the remainder that comes back to the grantor.

B

Okay, let's talk briefly about a couple of different types of cruts. Charitable remainder unitrusts. Right. There are net income cruts and there are flip cruts, neither of which I think I'd heard about before we got together to record this podcast. So tell us a little bit about those and how they might be useful.

C

Yeah. So moving back to our charitable remainder trusts, there is something called a net income charitable remainder trust. So basically, if you set that up, the trust only pays out income that it creates. So whereas if you have a regular charitable remainder trust and it has obligations to pay to the beneficiaries, it can even start to eat into the corpus, the principal that you put in there originally. For a net income remainder trust, it can only eat into. Sorry, it can only use the income that comes in.

B

Because that's how you wrote the trust document.

C

Correct. Because that's how you specifically set up the trust. You had to set it up as a net income charitable remainder unit trust. And so the benefit there is, if you don't want to be taking money out for a little while, it can stay in there and grow as long as you invest it in something that does not throw off much income, like VTI or something like that. And then later, if you're the trustee, you can say, okay, well, we need a little bit more money now, so I'm going to sell some of my vti and that creates a. An income event. And then more of that can get thrown off for you. And so you can throttle the income coming off the trust with a net income charitable Unit trust. You can also have it set up that it can be a sort of a makeup trust as well, where if for the first several years it doesn't pay something off, then you can have it pay extra the first few years to try to make up what it never actually paid out to you as

B

an additional option which could be beneficial to somebody that's still working now and in a high tax bracket and won't be in five years. So I can see why that would be beneficial to plan for somebody. This sort of stuff becomes much easier when you have a clear crystal ball as far as what's going to happen with you and your family and your economic situation a few years from now. And you could tailor this as best you can, but you could set it up so it's fairly flexible and changing the investments in there as you go along.

C

You could also set it up, let's say that you have a terrible diagnosis, that you have stage four pancreatic cancer, and you have a child that's 10 years old. You could set up one of these. Well, it could be a flip trust, which basically starts as a net income charitable remainder trust. But then when a specific event happens, you can turn it into a regular crutch. And so when the child is 10 years old, you can have the money just staying in there as a net income charitable remainder trust. And then when they turn 18, you can have it flip into a regular charitable remainder trust where it starts throwing off income to help pay for their college.

B

Very, very cool.

C

Or you can have that be for the birth of a child. Or a variety of events can happen where you can flip the crut, the, sorry, the net income, into a charitable remainder unit trust.

B

Yeah, that's a good example. Stage 4 pancreatic cancer, where you typically have months but not years to live. And it gives you time to do some planning like this. And you're not dying immediately, but you're not going to live a long time, you're pretty sure. So that's kind of an ideal example for, for setting something like that up for the people you're leaving behind.

C

You can also put in some other contingencies there. There are some qualified contingencies for early termination of the trust. When your child is 10 years old, you don't know exactly what type of person they're going to grow up to be. There's still the peer pressure of high school and concerns of drug use and things like that. So you could set it up that the crut could have an early termination if they were, say addicted to drugs or gambling or when they even have a positive event like they finish college, you turn off the faucet. So they have to, you know, go out and get their own job.

B

Now, can the designated charity for these trusts. It can. You mentioned earlier, it can be your own donor advised fund. Can it also be your own private foundation?

C

So private foundations can get a little bit tricky. Tricky with doing that in terms of self dealing. So you have to be careful in terms of whether it's a craft, sorry, a lead trust or a remainder trust about setting that up. It is possible, but there are some. A little bit of a minefield there. And I'd recommend getting professional help.

B

Yeah, I think you probably need professional help about any of these. I don't know that I would view a charitable trust as a DIY project for anybody. You're probably going to be wanting to. You're going to need to be talking to an attorney for sure and probably an accountant and maybe some sort of an investment advisor as well when discussing that.

C

In addition, if you're going to leave to a private foundation as opposed to a public charity, it also does limit the amount of write off you can have on any single year. For a public charity donation, you can write off up to 30% of your adjusted gross income every year on your taxes. But if you're donating to a private foundation, that is limited to 20% a year. So that's another factor to take into account.

B

Yeah. And does it vary as well by whether you're donating cash or some appreciated asset?

C

Yes. So if it's cash for a public charity, you can write off to 60% off the 30 and 20%. I was just assuming donating an appreciated

B

Asset, that's not 60% of what you're donating. It's 60% of your adjusted gross income.

C

Of your adjusted gross income. Yeah. So if you make $200,000, you can write off up to $120,000 of that income. I just say if your GROSS Income was $200,000, then you can write off up to an additional $128,000. If you give cash, that's 60% of the $200,000. If you're giving a appreciated asset, it's 30% for those are both for public charities. If it's for a private foundation, you can only write off 30% of a cash gift of your adjusted gross income and 20% of any appreciated asset.

B

Yeah. And so that matters, especially since a lot of times at the time you get rid of the appreciated asset, your Practice or business or whatever, your income goes down a lot. And so if you can't use that whole deduction in the year of sale, you may not be able to, you know, even though you can, you know, carry it out for a few more years, you may not have much income to use it against going forward, depending on what your financial situation is. So you have to be a little bit careful on sizing that and understanding exactly how you're going to use that deduction that you're getting. Okay, well, our time is now short. What have we not talked about with charitable remainder trusts that you think we should mention? With charitable trust in general, not just remainder trust.

C

So one last thing that I would mention is that if you are put in a business, as you mentioned, if it's an active business that's happening, there can be unrelated business taxable income and that gets taxed terribly within that trust. So really what goes into the trust needs to be mostly a passive investment in order to be in there and not be taxed at a significant amount. So just as an example, if you had a piece of real estate that was completely paid off in the mortgage and you were basically just collecting rent, that's considered passive income. However, if you have to, if you have a mortgage that's more considered an invest, it's more considered an active business now. So you'd have to make sure any mortgage is paid off if there's work that has to be done to make sure something happens. So if you had a business doing vending machines, well, there's work to be done. Go to the vending machine and fill them and take the money and manage the inventory. So that's considered unrelated business. And there would be a tax that would be something that's be taxable and that's taxed at a very high rate for the trust.

B

Same issue people run into with leveraged equity real estate inside of IRAs. So same issue there. Okay, well, here's your chance. You've got the year of 20, 25, 30, $35,000. I don't know how many people are going to listen to this episode. White coat investors out there. What would you like to tell them?

C

I would encourage everybody to try to make charitable giving a part of their written financial plan and to sit down as a family and decide what's important to you and what causes you want to give to and how much and how often you want to be giving. And then from there you can work out a plan that benefits the charity, but you can also make sure maximally benefits you.

B

All right, Matt, thank you so much for being willing to come on to the White Coat Investor podcast and educate us about charitable trusts and share the knowledge you've accumulated over the years as you've really dove into this subject in detail.

C

It's my pleasure.

B

All right. I hope you enjoyed that as much as I did. This is something that I have a different mindset on than I had a decade ago, and part of that is just I'm a wealthier person now and you start thinking, what's the end game for White Coat Investor for me personally? Right. Obviously we want White Coat Investor to live forever, but am I ever going to sell this? How am I going to sell it? Would it be beneficial to put it in a trust first? Would it be beneficial to put it in a charitable trust first? All those kind of questions come up all the time, as they should, if you have appreciated assets or you face a big tax bill one year or you just have a good reason to have a split interest gift. And we went over some of those reasons today and I know most White Coat investors are never going to use a charitable trust, but there's a significant number of you out there for whom this would be really beneficial. So I hope that episode was helpful to you to kind of introduce the concept and get you thinking about how you might use a charitable trust. The episode was brought to you by KeyBank, one of the nation's largest full service banks offering banking, lending and financial solutions for healthcare professionals at every stage of their career. Key's suite of services includes student loan guidance and financial education tools to help clients find financial peace of mind. To learn more and for terms and conditions, please visit whitecoatinvestor.com KeyBank all right, thanks. For those of you telling your friends about the podcast, it is helpful. We know we grow mostly by word of mouth. We've been doing this for a long time. We ask you how you found out about it and for most of you, somebody handed you a White Coat Investor book or said you should check out the White Coat Investor or sent you a link or something. So thank you for all of you doing that. Another way that you can share this amazing resource with other people is by just leaving a five star review for this podcast. Wherever you get your podcasts, we had a recent one come in that said amazing knowledge. All docs, high earners or just typical income optimizers should listen. Thank you for all that you do. Thumbs up, five stars. We appreciate those reviews. They do help us to spread the word. All right, that's it for today. Keep your head up, your shoulders back. You've got this. We're here to help you. We'll see you next time on the White Coat Investor Podcast.

A

The White Coat Investor Podcast is for your entertainment and information only and should not be considered financial, legal, tax or investment advice. Investing involves risk, including the possible loss of principal. You should consult the appropriate professional for specific advice relating to your situation.