Dear Rotary One Percenter,
If you are a Rotary one percenter, I thought I would write to you today about joining the Arch Klumph Society. That’s because to join the Arch Klumph Society you have to give a total of $250,000 to the Rotary Foundation, and that, my friend, is no small chunk of change. However, you may find it interesting to know that your Rotary friends in the top 1% of income and net worth in the U.S. and around the world have many interesting choices to consider if they want to join. My other, non-one percent readers, might be interested, or horrified, to know that you need to earn $389,000 of household income to be in the top 1% of wage earners in the U.S., and have an estimated $8-9 million of assets to be in the top 1% of net worth. (This one percent thing is a little complicated, so just trust me on the numbers.)
If you happen to be a Rotary one percenter reading this article, you will probably be aware of the fact that we live in a disinflationary world characterized by a crash in worldwide interest rates. If you live in the U.S. and want to earn some interest on your money, you can lend the U.S. government money for ten years in the form of a U.S. Treasury Bond and they will pay you the whopping annual interest rate of 1.95%. Or, if you want to lend Uncle Sam money for thirty years you get paid 2.51% per year. YIKES. If you don’t want to climb out on the yield curve and you want to keep your money in cash you get paid nothing. Nadda. And in many parts of the world you actually have to pay the bank to stash some cash in their accounts. That’s right. Major banks in Europe are currently offering negative interest rates.
If you don’t want to invest in bonds in order to drive an income stream from your portfolio, you might consider investing in stocks and selling them as needed to pay your bills. The problem here is that 1) stocks are now, by many traditional measures, very overvalued and are due for a major correction, and 2) it seems that the tax on capital gains keep increasing. There is now a surcharge for the Affordable Care Act of 3.8% and when added to the top capital gains tax rate it will cost you 23.8% in taxes to sell some shares to pay the bills. Ouch. (At this point non-one percenter Rotarians may be saying something like, “Cry me a river, pal.” But this letter isn’t for you so pipe down.)
Not to mention the fact that stock prices are up and yields are down. Lets say you got rich owning a diversified portfolio of stocks that matches the yield of the S&P 500 stock Index. You are currently getting paid a yield of 1.9%. REALLY? Only 1.9%! What if you are a Rotarian named Forest Gump and you own a huge portfolio of Apple Stock? (APPL) You are getting paid a dividend of 1.76%. It’s hard to pay the household staff on that kind of dividend, isn’t it?
So…to review. You’re a rich Rotarian and nobody but me cares about your troubles. You can’t earn any money on your money in the current market environment without taking a preposterous amount of risk. You can’t earn anything in the bond market. The stock market is expensive and doesn’t pay much in the way of dividends, and capital gains taxes are through the roof…and are probably headed higher. What to do?
I’ll tell you exactly what to do. (NOTE: Don’t consider this unless you want to quadruple your income, get a huge current tax deduction, avoid a huge capital gain on the sale of your appreciated securities, and become a certified warrior for world peace with a plaque on the wall of One Rotary Center with your name on it as a brand new Arch Klumph Society member.)
First, call your Major Gifts Officer at the Rotary Foundation and tell him or her that you are about to make their day. You might also mention that Ken Solow sent you.
Next, establish what is called a Charitable Remainder Unit Trust (CRUT) at the Rotary Foundation. (ANOTHER NOTE: Everything you are about to read sounds too good to be true. Sometimes rich people can get a break and this is one of them. If you are about to stroke a check for $250,000 to benefit my favorite charity, then I will lead the standing ovation for you. As they once said at McDonald’s, “You deserve a break today.”)
First, select $250,000 of cash that is absolutely dead money, or $250,000 of bonds that is nearly dead money, and gift it to the Rotary Foundation. Regardless of all the financial benefits that will accrue to you, the Rotary Foundation will give you full credit for this gift and you will get full recognition as an Arch Klumph Society Member. Guess who else will be impressed? The IRS will cheer when you cut this check for cash and if you and your spouse are ages 60 and 57 respectively, they will allow you a charitable deduction of $64,065. (ANOTHER NOTE: If you are a tax attorney or in the business of giving financial advice, you know that all of these numbers depend on specific personal financial issues. Please get a grip. I will tell everyone not to do anything without checking with his or her tax advisor later. I’m trying to close a deal here for cryin out loud.) If you are in a high tax state and paying the highest marginal tax rates then the deduction is worth about 50% or $32,000. That’s right. You get paid $32,000 to be an Arch Klumph Society Member. Just sayin.
You made a gift of cash so it cost you absolutely nothing in terms of lost earnings. But wait, it gets better.
The Rotary Foundation will invest your money in a professionally diversified portfolio. You give them the $250,000 and choose what Rotary program you want to support after the death of you and your spouse. But get this…you get to keep the income for your life AND the life of your spouse. And now for the $250,000 question… What rate of income gets paid to you from your Rotary Trust? NO LESS THEN 5%! “What? you say. How can they do that? I wasn’t getting paid anything from my cash and almost nothing from my bonds.’ They can do it because they are paying from the earnings generated by the total return of your account, not just the interest rate on your account. As long as the TRF portfolio earns a total return of 5% you get paid 5%. So instead of earning nothing on your cash, less than 2% on your bonds, or less than 2% on your stocks, you now get paid a cash income of 5%!
But…it gets even better. No really. It gets even better. Let’s say your money is invested by TRF and it earns more than 5%. Then in subsequent years you still get paid out 5% of your principal, but the principal IS REVALUED EVERY YEAR. So if you initially give $250,000 to TRF and your money earns 7% and you choose a 5% withdrawal rate, in subsequent years your income stream is going to grow by 2%. You see? Your $250,000 grew by 7%. You withdrew 5%, and the remainder sits in the trust where next year you will withdraw 5% of the new balance of $255,000. So instead of getting $250,000 x 5% of income, or $12,500, you get 5% of $255,000, or $12,750. If the investments at TRF average more than 5% every year then your income grows every year. Does that sound better than a Treasury bond paying a flat 1.95% income taxable every year? You betcha.
Yes, it’s true. If your money earns less than 5% then you take a 5% withdrawal from a smaller principal balance that year. But who cares? Your rich for Pete’s sake.
But, you say, I have my Forest-Gump like stash of Apple stock with very low basis that is going to cost me 23% of capital gains to sell? Just give the shares to TRF and Uncle Sam will still give you a charitable tax deduction, (it’s less than a deduction for giving cash, but hey…don’t be greedy), AND TRF will sell the shares for you while you avoid paying $59,500 of capital gains taxes. So, Uncle Sam pays you to make the charitable gift in the form of a tax deduction. You avoid a $59,000+ capital gain. And you turn a dividend yield of 1.76% into a 5% yield that is likely to grow over time. As we like to say in the finance business, “ain’t that better than a stick in the eye?”
And so, Rotary one percenter, you are now asking, “what’s the catch?” The catch, my friend, is that almost none of this makes financial sense UNLESS you are interested in supporting the Rotary Foundation and all of its great programs and good works. The net cost to you to be an Arch Klumph Society Member, the most revered level of giving in Rotary, is probably less then you thought. But there is still a cost and you need to consult with your tax experts, and the experts at Major Gifts at the Rotary Foundation, before you embark on a sophisticated strategy like funding a CRUT for you and your family. However, make sure you read this article a few times before you put yourself in the hands of the geeks and let them confuse you. I just gave you the straight scoop on how it works. I know…it’s so good it’s hard to believe.
2015-2016 RI President Ravi Ravindran’s Rotary theme is “Be a Gift to the World.” If you happen to have an extra $250,000 lying around, earning little to nothing, or locked up with a low cost basis, please consider “Making a Gift to the World.”
Uh…one last thing. You don’t need to write a check for the whole $250,000 at one time to get started funding your CRUT. But…what the heck. It will make you feel better then remodeling the kitchen….again.
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