CRTs Are Back, Alive and Well! Allyson Simpson Senior Director, Office of Gift Planning Western Regional Planned Giving Conference Costa Mesa, California May 29, 2015
A Quick Primer on Charitable Remainder Trusts
A Quick Primer on Charitable Remainder Trusts • CRT - A tax-exempt trust arrangement in which a donor irrevocably contributes cash or other assets to a trust and names one or more persons to receive the income for life or a term of years, with the remainder distributed to one or more charities when the trust terminates • “Split interest gift” – the income and remainder interests are “split” between different parties • Governed by IRC Section 664, which was added to the IRC by the Tax Reform Act of 1969. CRT’s are closely regulated by the IRS • IRC sets the rules and restrictions for CRT’s, including payout percentage (irrevocable); lifetime term or term of years; four-tier taxation of payments
A Quick Primer on Charitable Remainder Trusts • Types of CRT’s Standard unitrust (CRUT) Net Income unitrust (NICRUT) Net Income unitrust with makeup (NIMCRUT) Flip unitrust (Flip CRUT) Annuity trust (CRAT) • Donor receives charitable income tax deduction equivalent to present value of ultimate remainder gift to charity • Funding assets are removed from donor’s estate
A Quick Primer on Charitable Remainder Trusts • 10 Percent Minimum Charitable Deduction • Trust is irrevocable. Trustor may retain certain limited authority to amend the agreement only in the agreement at the time the trust is set up, not after the fact • Unrelated Business Taxable Income (UBTI) – 100% taxable to CRT • Donor can make additional contributions to CRUT’s but not to CRAT’s
Recent History of CRT Activity
Recent History of CRT Activity • Prior to 2008, CRT activity was robust, with values of appreciated funding assets (primarily stock and real estate) running high (cash and highly appreciated assets are the most popular CRT funding assets) • With the financial downturn of 2008, assets lost value and people retrenched in an effort to save value where they could and hold on to their wealth • Since CRUT payments are variable based on the market value of the trust, even those who had assets found the prospect of declining payments from a CRUT undesirable
Recent History of CRT Activity • As the stock market has come back intermittently to record highs and real estate has gradually rebounded, asset appreciation and confidence have started to return • Income tax rates have increased and the 3.8% Medicare surcharge was added in 2013 against dividend, interest and royalty income for persons above certain AGI limits • CRUT activity has increased and the positives for many people outweigh the negatives. A CRUT can turn an appreciated asset into a tax effective income stream • Many baby boomers are heading into their mid to late 60’s – 65 to 70 is the most popular age range for setting up a CRUT
Flexibility and Creativity in Gift and Tax Planning
Flexibility and Creativity in Gift and Tax Planning • CRT is tax exempt – no income tax on trust (except for UBTI). • Eliminates or substantially reduces capital gains liability on highly appreciated funding assets and allows reinvestment of the capital gains in those assets in a diversified portfolio • Turns a low- or non-income producing asset into an increased income stream • With a CRUT, income is variable – calculated each year by applying payout rate to trust market value on a certain date • Allows income planning for current or future needs (e.g., retirement income, education costs, health care costs) – income receipt can be deferred to a future date through a Flip CRUT
Flexibility and Creativity in Gift and Tax Planning • Removes funding assets from donor’s estate thereby reducing estate tax liability • Skillful management of trust investments can positively affect four-tier taxation of income payments • CAVEAT: Always be mindful of possible gift tax issues if income beneficiaries are other than donor or spouse • CRT’s can have any number of income beneficiaries (unlike a CGA which can only have a maximum of two) • Small organizations or gift planning staffs should not be reluctant to include CRT’s in their gift discussions even if the organization is not able to serve as trustee – the donor, a trusted advisor or a professional trustee can serve in that capacity and the charity can still be the remainder beneficiary
Flexibility and Creativity in Gift and Tax Planning • Best CRT donors: Own highly appreciated assets Their funding assets can easily be valued, due diligence can reasonably be performed by charity or other prospective trustee and there is a market for the sale of the assets (but no prearranged “buyer in the wings”) Want or need tax efficient income for themselves or others Want to benefit charity
Case Studies How CRT’s Can Work for Your Donors and Your Organization
Case Study #1 – How CRT’s Can Work for Your Donors and Your Organization Case Study #1 – Mr. Taylor Mr. Taylor is 68 and an alumnus of your university. He has been a moderate and reasonably consistent annual fund donor over the years but has never really responded to your outreach regarding a more substantial and impactful gift. He always seems to have a reason not to make such a gift – he is not a “wealthy” man and will need all his cash and other assets for retirement and possible health care costs in the future. He notices an article in your newsletter regarding funding a CRUT with appreciated real property and gives you a call. He provides a new piece of information – he has owned an eight unit apartment building for 30 years and is tired of being a landlord. Since he bought it for $100,000 and it is now worth $2 million, he can’t afford to sell it and pay the capital gains taxes. He wants to know more about “these CRUT’s” that you featured in the newsletter.
Case Study #1 – How CRT’s Can Work for Your Donors and Your Organization • Issues/Actions Who owns the property? Explain Flip CRUT, including tax benefits Who will serve as trustee – initial and successor? Who will be income beneficiaries? Designation of remainder (irrevocable unless agreement provides for donor’s right to change) Due Diligence – appraisal, broker opinion, preliminary title report, environmental impact report, leases/notices to tenants/possible UBTI Internal approvals
Case Study #2 Case Study #2 – Jim and Jane Evans Jim and Jane Evans have been supporters of your organization for a long time. They have let you know that your organization is the sole beneficiary of their seven figure estate (they have no children). You have a close relationship with them and they feel comfortable discussing financial matters with you. Jim e-mails you one day wanting to discuss a potential income tax problem they may be facing in the near future. They hold a large number of shares of Pharma Corporation which Jane received many years ago when she worked for Pharma Corporation. Their acquisition basis in the stock is close to zero. They have received notice that a foreign corporation is planning to acquire Pharma Corporation in an “inversion” transaction which will cause Jim and Jane to incur a substantial capital gains liability. Jim asks for your help since time is of the essence.
Case Study #2 • Issues/Activities Confirm ownership of stock Flip or immediate CRUT Who will be income beneficiaries? Designation of remainder (irrevocable unless agreement provides for donor’s right to change) Stock transfer instructions
Case Study #3 Case Study #3 – Mr. Northrup Mr. Northrup’s attorney calls your office and asks if your organization would be willing to act as trustee for a CRUT funded with an interest in a partnership that holds a large parcel of income property. Mr. Northrup is not currently affiliated with your organization and his name is unfamiliar to you, so you thank the attorney for his client’s interest and ask him how Mr. Northrup came to the decision to benefit your organization. He replies that Mr. Northrup’s mother once worked for your organization and always spoke fondly of it. The idea of the CRUT came up when Mr. Northrup came to his attorney asking for advice regarding tax and legal liability since the partnership has decided to sell the income property, which was acquired for a very low cost several years ago. The property’s value has now increased ten fold, and Mr. Northrup wants to get out of the partnership with the least amount of tax liability. The idea of receiving a lifetime income with beneficial tax treatment and an income tax deduction is also attractive to him.
Case Study #3 • Issues/Activities Gift Acceptance Policies of your organization – are partnership interests an acceptable funding asset? Partnership documents, especially re: transfer of partnership interest to a third party Verify ownership of partnership interest and real property Explain Flip CRUT Designation of remainder (irrevocable unless agreement provides for donor’s right to change) Who will be trustee, initial and successor? Due Diligence – appraisal, broker opinion, preliminary title report, environmental impact report, leases/notices to tenants, possible UBTI
Some Final Thoughts
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