After a 51-year-old Massachusetts man was handsomely compensated with company stock during his years of employment at a publicly traded data warehouse firm, he became wealthy on paper. But he wondered what might befall him financially if something unforeseen happened to his company.

Seventy-five percent of this client’s $10 million liquid net worth and half of his overall estate of $15 million was tied up in his company’s stock. And he had more stock vesting in the next few years if he kept working there. Much of the stock had appreciated considerably, but it had a very low cost basis, which is what would have been used to determine his capital gains tax if he sold it outright. That would mean a big tax hit.

The client was also at an age where he was thinking about exploring other employment opportunities, as well as considering future retirement options, inheritance possibilities for his children and a charitable legacy.

With all of these thoughts in his head, the man understandably had many questions, and wasn’t getting satisfactory answers from his financial advisor. That’s when he was introduced by an estate planning attorney to Edward R. Jastrem, director of financial planning at Heritage Financial Services in Westwood, Mass.

“He knew he was looking at taxes, taxes and more taxes if he sold, which made him unsure how to diversify, which is one of his primary goals,” Jastrem says. “He had wealth, but that could have changed with so much of it tied up in his company’s stock. He also wanted a clearer picture about his ability to leave the company if he wanted to do something new.”

Simply leaving wasn’t a great option either. “If he left the firm now, he would leave $1 million to $1.5 million on the table in unvested stock,” Jastrem says.

Enter Heritage Financial
Heritage Financial has more than $2 billion in assets under management after growing from $400 million 15 years ago. The firm serves clients with an average net worth of $5 million.

Jastrem met with his new Massachusetts client four times, and during those meetings began to lay down a comprehensive financial plan, something that continues to unfold this year.

That plan included a charitable remainder unitrust, or CRUT. This vehicle pays a percentage of its value each year to a beneficiary—perhaps the trust creators themselves or their spouses. The annual payments generally must be at least 5% and no more than 50% of the fair market value of the assets, which are re-evaluated each year. When the trust expires, the assets pass to a charity.

Jastrem thought this particular vehicle would be of great use for his Massachusetts client. As long as the client continues to work for the same company, he will receive more stock benefits, which will go into the trust.

“The client can transfer some of the stock he now owns to the trust and defer the capital gains tax until he is in a lower income tax bracket, thereby lowering his overall tax bill this year,” Jastrem says. Although the client had previously worked with another advisory firm, “no one there had presented this option to him as a way to lower his immediate tax bill and set up an annual payment that would carry over into retirement.”

The main difference between a charitable remainder unitrust and the better-known charitable remainder annuity trust is that additional contributions can be made to a unitrust after it is set up, which is not true for the annuity trust. “With this particular client, I believe it is likely we would start off the CRUT with $1 million, but may add more over time, so using the CRUT gives us that flexibility. There is more certainty in what the income distributions will be with a CRAT, but that isn’t the main priority in this case,” Jastrem says.

The unitrust is revalued at the end of each year—at which point the fair market value of its assets is determined and the beneficiary receives a percentage. That means the trust’s assets could produce less income during a down market.

A unitrust can also be paired with a donor-advised fund, which can be named as the beneficiary of the trust assets when the client passes, Jastrem says. His client is considering doing that this year. “With this strategy, you get the immediate tax benefits of the unitrust, and you gain the ability to advise how the charitable dollars are invested, as well as control the amount, beneficiaries and timing of the distributions to charity, all of which are attractive benefits for this client.”

Donor-advised funds also allow the children to get involved in making charitable grants, so the family can pick charities together. Then the client can name the children as successor grantors of the donor-advised fund to continue the gifting legacy after the client passes away, when the remainder of the unitrust flows into the donor-advised fund.

Jastrem says the Massachusetts client also wanted to create an income stream in retirement, something the charitable remainder unitrust allowed him to do. “Depending on the CRUT investment performance, the income distributions may be able to increase with inflation. The amount left in the trust at the end of the person’s life is given to charity. That exact amount is an estimate, as we don’t know how long the client will live or what the investments will return. The donor receives a charitable tax deduction in the year of transfer. The transfer to the trust is irrevocable.”

The more the beneficiary receives each year from the trust, of course, the less that will be left for charity in the end.

“Those are the calculations we are doing now,” Jastrem says. “2023 may be the last year he is in the highest tax bracket, but based on preliminary calculations it looks like his charitable contribution deduction could save him $60,000 in taxes the initial transfer year, which will be 2023.”

The client also wants to sell some of his company stock outright, but he will wait until stock prices recover to do that. He may still have a couple of high tax liability years now, but the changes that are being made will lower his tax bill in the future, with some of the stock being sold in years when his income puts him in the lower bracket.

These changes could also normally reduce his state-level taxes, though whether that happens in Massachusetts is still up in the air, Jastrem says.

“Massachusetts has not had a state-level charitable deduction in prior years, but it may enact one for 2023. As of 2023, there is also a new surtax of 4% on income over $1 million in Massachusetts, which is another reason that careful planning around capital gains taxes is now more important for high-income clients.”

“The fact that so much of this client’s stock has a basis cost that is so low is another reason a CRUT, which defers capital gains taxes, fits so well,” Jastrem says. Any taxes that are deferred or avoided completely means more money will be available for the client, for the children or for the charities the client will designate in the future.

“I am pleased with the groundwork we have been able to lay so far and the team that we have been able to build with his estate planning attorney and tax attorney. The client is a lot closer to his goals now than he was a year ago,” Jastrem says.