In 2001, a client came to financial advisor Bob Frey with a unique dilemma — and a fateful sense of timing.
The client, a personal friend of Frey's, had a net worth of $10 million, and almost $7 million of it was in a single blue chip stock. The shares had been passed down from the client's father, who had spent his career at the company.
The client thought the stock, worth about $100 per share, was great. He wasn't keen on selling.
"He didn't recognize the huge business risk — that the stock can plummet, even if the market goes up," said Frey, who founded Professional Financial Management in Bozeman, Mont. (He has since sold the firm, but works there some.)
Frey's client had almost no cost basis in the stock, so simply selling it would mean big capital gains taxes. The client and his wife were retired and living off the stock's dividends. They loved to travel, but they were also quite generous, giving money to their church and the client's alma mater.
That generosity pointed Frey to a solution. He suggested that his friend create a charitable remainder unitrust. "We always stress charitable techniques for our clients if they demonstrate any charitable bent," Frey said.
Such a trust would provide them with income for the rest of their lives, including the wife's, which was important as she was 16 years younger than her husband. It also offered a tax deduction in the year of the gift, and deferred and reduced the amount the couple paid in capital gains.
Frey's client was convinced and made his alma mater the beneficiary. An accountant helped calculate a maximum annual payout in line with tax rules and, in October 2001, the client gave $2 million of his appreciated stock to the newly formed trust. The vehicle would pay out 9.2% of its total value to the client each year.
As for the investments in the trust, Frey immediately sold the stock and put the money in tax-efficient stock funds. A few years later, New York authorities announced they were investigating the blue chip company. The share price plummeted overnight. And 10 years later, the trust is still worth $1.8 million.
