Selling Remainders of CLTs to Investors to Raise Cash Today

Selling Remainders of CLTs to Investors to Raise Cash Today

Posted by: admin, in Asset Protection

In a prior Small Talk I explained some of the ways that Charitable Lead Trusts can be used to pass on a large estate to heirs at drastically reduced tax rates.  Doing this can create huge income tax write-offs for the donor while providing for future generations as well as pet charities. 

The only catch for many of the heirs is that they must wait many years in order to receive their share of the estate. 

This has spawned a new industry that focuses on buying the residual estate that is going to be passed on at a deep discount in order to put cash into the hands of the heirs immediately so that they don’t have to wait decades to receive it.

This approach works exactly the same way that any sale of discounted mortgage Notes or Insurance Annuities, or Lottery Winnings works. 

• The sum to be received is discounted by an entrepreneur, then immediately re-discounted to an investor. 
• The middleman makes a profit based upon the difference in the discounted amounts. 
• For example, if $1,000,000 were going to be received in 10 years, it might be discounted to yield 7% and bought for about $463,000. 
• Then it might be re-discounted to a tax-free Roth IRA or Pension Fund, or Insurance Company to yield 6%. 
• This would increase the price to around $558,000. 
• The profit would be the difference, or $95.000.

Bear in mind that, by getting all his ducks in a row, the entrepreneur might easily have pulled this off by putting everything into escrow and letting the ultimate buyer provide the funds with which to buy the future interest in the first place.

As the credit market tightens up, being able to discount and sell loans this way is going to become a major opportunity for those who understand how to calculate the yields and values.  If you were going to begin learning something new, this would certainly be worthwhile.  What other things can you think you might be able to discount?  What is preventing you from learning how to do this?

Jack Miller

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