All’s Not Well, That Doesn’t End So Well (Either)

This would be a frustration post (but with some interesting gift planning tossed in).

Quick facts:  I gave an estate planning seminar to a group of prospects/donors for a client.  Someone in the audience came up after the speech with a bunch of detailed questions about CRTs.  It became quickly clear that this person had set up his own CRAT, had gotten some really bad advice on the principal investment, and the trust was definitely heading towards insolvency in the not so distant future (10 years max at my guess).

I offered my compassion, especially since his charitable goals were going down the tubes, along with the not-so guaranteed income.

This initial meeting spurred talks with his financial adviser through the charity I had been speaking for.  Basically, the donor had three options: 1. keep his income and let the CRT run out of money; 2. give up his income and let the charity get something; or 3. exchange his right to the CRAT income for a CGA income (based on the net proceeds transferred to the charity).

I made sure several times that the donor heard option #2 clearly – not to jump to # 3 so quickly.  That said, we started discussions on option #3.  Without revealing any significant details, basically a new CGA for this donor would give him 50% of the CRAT income (but this time guaranteed for life), a new massive deduction (because the AFR is really low – will try to explain in another post), and the satisfaction that there would be a nice gift to the charity at the end.

Any glitches?

Firstly, can this be done?  Yes.  Luckily for us in the gift planning world, there is a private letter ruling describing the whole deal (double click on this link:  Letter ruling on converting a CRT to a CGA).  The one glitch I saw from the letter ruling was the requirement to use a zero basis for the new CGA – which basically turns the entire “tax-free” portion into a capital gains portion for the donor’s life expectancy.  But, the new deduction (which PGCalc does a qualified appraisal for about $300) was plenty to offset that negative aspect of the deal.

What went wrong?  This was a perfect deal.  A solution for a problem that results in a new gift, happy donor, etc…

The advisers!  Actually, the same people who gave the bad advice on the CRT investment.  I went over the letter ruling with their tax experts but I sensed that charitable structures, especially a more sophisticated one like we were contemplating, were completely foreign to them.

And, sure enough, after the donor met with the so-called tax experts, today’s message was the donor was too nervous to rely on a private letter ruling.  I wonder where he got that message.

Read that letter ruling, it is actually pretty straight forward (except for the zero basis thing).  The letter ruling tells you how to do this.  This is about the only decent solution for a collapsing CRT that salvages something for the donors and the charities.

It’s not over – as this donor has to think about this CRT every time he sees the investment statement .  If he decides to donate his CRAT payments to charity – I could see that as somewhat of a solution.

My frustration is that the same bumblers who helped cause the problem, are the same ones most likely preventing the best solution from taking place.  I know, and warned everyone involved, that this donor needs to be completely informed and on board with the deal and needs to have independent legal advice.  But still, something gnaws at me that these “advisers” are a bit clueless.

One comment

  1. We fortunately have had more advisors–usually lawyer trustees rather than brokers or other financial service types–accelerate remainder interest in this kind of situation, so that we as charitable remainderman get something (your option #2). All of these have been very modest CRATs with what now are high payouts, 7% and up. In at least one of these cases, the acceleration was “forced” by specter of high bank fees that would have emptied out the trust corpus at an even quicker rate given its modest size. And in all but one case, donor would have been much better off using a CGA in the first place, but from what I can tell, we were not part of the conversation when the trusts were originally created back in the go-go 90s (remember them?).

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