Monthly Archives: February 2015

Using CRUTs & CRATs to Sell Your Business Interest

These estate planning tools may also help in exit planning.

eggsDiscover a pair of underappreciated exit planning vehicles. Charitable remainder unit trusts (CRUTs) and charitable remainder annuity trusts (CRATs) are commonly seen as estate planning tools. What frequently goes unseen is their value in exit planning for business owners.

Does it look like you will sell your company to a third party? Do your “second act” or “third act” goals include financial independence, philanthropy and leaving significant wealth for your heirs? If you find yourself answering “yes” to these questions, a CRUT or CRAT may help you accomplish those objectives and enhance your outcome.

CRUTs & CRATs are variations of charitable remainder trusts (CRTs). A CRT is an irrevocable tax-exempt trust that you can fund with highly appreciated C corporation stock (or optionally, other types of highly appreciated assets).

How do you sell your ownership interest through a CRUT or CRAT? As the trust creator (or grantor), you donate said C corp stock to the CRUT or CRAT. Because the trust is tax-exempt, it can sell those highly appreciated C corp shares without triggering immediate capital gains tax.(1)

The CRUT or CRAT sells your ownership shares to the outside buyer of your company, and it becomes your tax-exempt retirement fund. It invests the cash realized from the sale of your ownership shares in either fixed-income or growth securities; it provides you with recurring payments out of the trust principal, which occur for X number of years or for the duration of your life (or even longer). The payments can even go to people other than yourself – they can optionally go to your parents, they could go to your grandkids.(1,2)

You are offered another tax break as well. You can take a one-time charitable income tax deduction for the value of the donation used to fund the trust (i.e., a tax deduction applicable in the current tax year). This demands an appraisal of the highly appreciated assets being donated to the CRUT or CRAT, obviously. The deduction amount also depends on calculations using IRS life expectancy tables, the term of the trust, interest rates, and payout schedules and amounts.(1,3)

On one level, a CRUT or CRAT is an agreement you make with the IRS. In exchange for all these tax perks, you agree to give 10% or more of the initial value of the CRUT or CRAT to a qualified charity or non-profit organization. Many CRUT or CRAT grantors intend to leave no more than that to charity.(2)

When the grantor passes away, a last tax break occurs. While 100% of the trust assets now become part of his or her taxable estate, the estate may take a deduction for the remainder  interest that goes to the qualified charity or non-profit.(3)

Some CRUT and CRAT grantors strategize to offset the eventual gifting of 10% (or more) of trust assets. They have the beneficiaries of the CRUT or CRAT fund an irrevocable life insurance trust (ILIT). When the grantor passes away, they receive insurance proceeds sufficient to replace the “lost” wealth. Since the ILIT owns the life insurance policy, the life insurance payout isn’t included in the taxable estate of the deceased and it isn’t subject to transfer taxes.(3)

What’s the fundamental difference between a CRUT & a CRAT? The difference concerns the recurring payments out of the trust to the grantor. In a CRUT, those payments represent a percentage of the fair market value of the principal of the trust (and that principal is revalued annually). In a CRAT, they represent a fixed percentage of the initial value of the principal.(1)

Older business owners may find the CRAT is a more appealing choice, while younger business owners may be more attracted to the CRUT. Yearly distributions from a CRUT must amount to at least 5% and no more than 50% of the trust principal revalued annually. Yearly distributions from a CRAT must come to at least 5% but no more than 50% of the initial value of the donated assets.(1,3)

Can an owner fund a CRUT or CRAT with S corp shares? No. A charitable remainder trust can’t serve as a shareholder in an S corp, so if you donate S corp stock to a CRT, there goes your S corp status. It should also be noted that C corp stock subject to recourse debt can’t go into a CRT.(1)

Are you interested in learning more? Talk to a financial or tax professional about the potential of CRUTs and CRATs. What you learn may lead you toward a better outcome for your business.

Jason Ice may be reached at 216-831-7171 or

Securities offered through 1st Global Capital Corp., Member FINRA/SIPC
Investment Advisory Services offered through 1st Global Advisors, Inc
This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
1 - [11/18/14]
2 - [8/14/13]
3 - [11/18/14]


Are You Taking a Tax Deduction for Mileage?

Make Sure to Get All the Tax Deduction You Deserve

CarThe tax expert at Ciuni & Panichi have another tip for your 2014 tax return.

You probably know that miles driven for business purposes can be deductible. But did you know that you might also be able to deduct miles driven for other purposes? The rates vary depending on the purpose and the year.

The following is a sample of what you can deduct:

  • Business: 56 cents (2014), 57.5 cents (2015)
  • Medical: 23.5 cents (2014), 23 cents (2015)
  • Moving: 23.5 cents (2014), 23 cents (2015)
  • Charitable: 14 cents (2014 and 2015)

However the rules surrounding the various mileage deductions are complex.  Some are subject to floors and some require you to meet specific tests in order to qualify. There are also substantiation requirements, which include tracking miles driven. And, in some cases, you might be better off deducting actual expenses rather than using the mileage rates.  So make sure to talk to an expert and get all the mileage you’re entitled to.

If you drove potentially eligible miles in 2014 but can’t deduct them because you didn’t track them, then start tracking your miles now so you can potentially take advantage of the deduction when you file your 2015 return next year.

Contact Jim Komos at 216.831.7171 or  He can help ensure you deduct all the mileage you’re entitled to on your 2014 tax return, but not more.  No one wants to risk back taxes and penalties later.

 Use These Three Credits on Your 2014 Return

Save on Your Taxes by Accelerating Deductions

© 2015

How Real Estate Professionals Protect LLC Investments

real estate bldgReal estate owners and developers often form limited liability companies (LLCs) to hold title to property. One key reason for making the switch is that LLCs limit personal liability — only the LLC members’ equity investments are usually at risk. While these entities do offer protection from personal liability for the debts and liabilities of the entity itself, some exceptions exist that could drain an owner’s or developer’s personal finances.

Environmental Liability
Environmental liability is a common concern when purchasing property, and use of an LLC to make the purchase doesn’t make that concern moot. The Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) imposes strict, joint and several liabilities — no showing of negligence or intent is required — for cleanup costs on past and present owners and operators of facilities where hazardous materials have been released. An LLC member who had the authority to control the operations or decisions involving the disposal of hazardous substances could be held liable for cleanup.

Personal Guarantees and Contracts
LLC members who personally guarantee the company’s debts or obligations will be held liable for their nonpayment or breach. This is a true risk when entering contracts or financing agreements before the LLC legally comes into existence because the other party insists on some guarantee.

To minimize the risk of personal liability, always act in the name of the LLC. When you sign contracts, for example, do so solely as an agent of the LLC, making sure to identify the LLC as the principal in the document. Similarly, make sure that the LLC’s other agents and employees act as representatives of the entity and not of you personally. For extra protection, members might consider adding a personal umbrella policy to the LLC’s traditional business insurance coverage.

Certain loan defaults may also create personal liability. Carefully review all loan documents to make sure you completely understand the consequences of all potential covenant violations.
Wrongful acts

An LLC won’t protect a member from liability for his or her own negligent or otherwise wrongful acts that cause injury to another, such as assault or fraud. That could include negligent hiring or supervision of employees if an employee causes some type of injury and the member hired the employee in his or her own name, rather than in the name of the LLC.

Also note that, if an LLC member commits a wrongful act that causes injury while acting as an agent or employee of the LLC, it’s not just the member’s personal assets that could be targeted by the injured victim. The victim could also go after the assets of the LLC, under a theory of vicarious liability (also known as “respondeat superior liability”) for its agent’s acts.

A Pierced Veil
On rare occasions, a court will “pierce the corporate veil” to impose liability for an LLC’s debts and obligations on its members. This typically occurs when closely held and small businesses fail to observe corporate formalities such as holding regular board meetings, keeping minutes, adopting bylaws and ensuring company finances are separate from those of members. It could also happen if the LLC engaged in reckless conduct or fraud or was inadequately capitalized from the beginning. In all of these circumstances, a court might conclude that the LLC is merely a sham to shield its members from liability.

Protect Yourself
LLCs come with their benefits, but they don’t provide a total defense for members’ personal assets. The rules governing LLCs vary from state to state. Consult with your attorney and financial expert to devise asset protection strategies for your individual needs.

Ciuni & Panichi has experts in the construction and real estate field.  Contact John Troyer at 216.831.7171 or to learn how we can help make sure your financial position is safe.

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