By Chris Casacchia, California Business Journal.
Charles McLucas is expanding charitable giving while helping donors reduce taxes in the process.
The certified public accountant, who started his career in 1967 at the Internal Revenue Service, has been creating and managing charitable remainder trusts for nearly 40 years.
“I’ve probably done 15,000 to 20,000 charitable trust tax returns in my career,” says the chief executive of San Clemente-based Charitable Trust Administrators. “As a single, individual guy out there with a small business I’ve probably done as many or more than anybody in the country.”
The irrevocable trust allows donors to pursue philanthropy and receive annuity income in retirement until death, when the gift matures and the trust transfers to the designated charity or charities.
“They’re basically tools for folks who have built an appreciated asset over the years and need to get retirement income or just more income out of it,” says McLucas, who recently secured his first project over $1 billion.
The Silicon Valley client, his largest by far, runs an IT firm. The smallest charitable trust he has developed was about $50,000. Most clients choose a single charity or a few at most, though some select dozens more. One client bequeathed 50 charities in a trust, McLucas says.
Establishing a charitable trust costs about $2,500, and requires a rather complex four-tier accounting system, “which justifies my existence,” he jokes.
The most common appreciated assets are real estate and businesses, though McLucas handled about a dozen cryptocurrencies last year for clients in their 30s. “That’s atypical,” he says.
The majority of his 500 or so clients are baby boomers, between the ages of 60 and 65 who are selling a home or business they’ve had for decades.
This demographic, which includes millions of Americans on the cusp of retirement and/or in succession planning, will continue to grow in the coming years, regardless of the long-term effects of the coronavirus pandemic on retirement plans.
A report in the Chronicle of Philanthropy published in 2018 estimated nearly $9 trillion of wealth will be passed down to Gen Xers and millennials by 2027.
Charitable remainder trusts, according to McLucas, could fuel a philanthropic boom over the next decade, particularly for smaller nonprofits that survive this economic crisis.
Most manage endowments under $1 million and lack needed resources to contact and maintain relationships with big donors and the general public—annual expenses that typically eclipse six figures. Simply put, they can’t compete against industry giants or private universities and hospitals, which manage endowments sometimes in the billions.
“The charities that are going to survive COVID-19 are the ones that have some sort of endowment or some reserve in the organization to weather a tough time like this,” McLucas says. “My role is to help these smaller charities not lose all these dollars.”
To ensure that, he’s been pressing lawmakers to add 47 words to the U.S. tax code, specifically IRC Section 1361(c)(2)(A), which would permit S-Corporation owners to donate part or all their stock ownership interests to a charitable remainder trust.
The Tax Reform Act of 1958, which created S-Corp tax rules, omitted this option that’s been granted to other small business structures, such as partnerships, LLCs and C-Corps.
S-Corps, the largest corporate structure in the nation with over 5 million entities, are exempt from corporate tax rates and federal income taxes, except certain capital gains and passive income, such as investments and leases. Profits or net losses are passed through to shareholders and taxed once at individual tax rates.
S-Corps were established to provide liability protection under a single layer of federal taxes.
McLucas, who’s been working on the issue for nearly three years, has discussed amending the tax code with House staffers of Linda Sanchez (D-California) and Vern Buchanan (R-Florida), who both serve on the powerful Ways and Means Committee.
“I’m trying to get bipartisan support,” he says. He will include the language in a larger bill this year that will ultimately pass through Congress. “We’re getting close. I think it will get picked back up,” he adds. “It’s just the right thing to do for the people and economy.”
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