Charitable Remainder Annuity Trusts

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Planned Giving Boot Camp June July 2019

Wednesday, June 12, 2019 at 12:00 PM


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Wednesday, July 24, 2019 at 12:00 PM


Advanced CRTs

Tuesday, August 6, 2019 at 12:00 PM


Advanced CGAs

Wednesday, August 7, 2019 at 12:00 PM


Advanced Charitable Lead Trusts

Wednesday, August 14, 2019 at 12:00 PM

Commercial annuity as investment option for a Charitable Remainder Trust?

I worked on the issue of a commerical annuity in a CRT last year – the aftermath of a CRT investing its principal in a commercial annuity and the disaster that followed.

Now, thanks to the planned giving design center and an IRS letter ruling, use of a commercial annuity in a CRT might become more prevalent.  Click through to see the short letter ruling:

The question though is why would a trustee want to do this?

Let’s start with why not.  The story I worked on was a classic example of why not.  Unwitting donors created a CRT with a few hundred thousand dollars of hard earned money, to create an income steam for themselves and a remainder for great charitable works.

Sadly for them, everyone involved with the process of creating this CRT were absolutely clueless – from the drafting attorney to the third party planned giving specialty company to the investment manager.  The investment adviser saw that this trust needed to produce an annuity for the donors for their lives.  So, the investment adviser suggested to put the entire principal in a commercial annuity paying exactly what they are supposed to receive yearly. 

Problem: the principal was not guaranteed.  Second problem: the annuity wasn’t guaranteed either.  Third problem: stock market crashes and eats up the value of the principal.

This was an incredibly poor piece of advice given to these CRT donors. 

I actually devised a bailout plan for this disaster which entailed the donors relinquishing their interest in the CRT in favor of a charity, and that charity issuing a CGA on their lives.  The new income stream would have been about half of what the CRAT was paying but it would have at least salvaged a remainder and guaranteed a fixed income for life.

What they really should have done is sue all of the offending advisers involved – they were all sitting ducks for their so-called professional advice.

In the end, they decided to let the CRT languish.  Having been burned very badly once, I don’t think they were up for any more complexities and just hoped for the best.  Maybe the annuity recovered.  Maybe not.

There was a serious legal issue in that case that is not addressed in the letter ruling that just came out.  The question is whether a trustee should make such an investment, especially if it is not in the best interests of the remainder charities.  Prior rulings, I recall, required an independent trustee to help make this risky decision.

Bottom line, and why I wrote this piece, is that regardless of this new letter ruling, CRT trustees should be very cautious before ever investing in a commercial annuity.  It has to make sense for both income and remainder beneficiaries or the trustee deserves to be sued.

I did promise a discussion of why it would make sense for a CRT to invest in a commercial annuity.  Well, if it can guarantee a remainder, then it might make sense.  Something like reinsurance within a CRT.  The key is guaranteed principal for the charities while guaranteeing the income stream.  In the end, you might be giving up half or more of the principal to accomplish this but that isn’t so bad considering the cases where there is nothing left for the charity.

I have discussed before that I actually believe that reinsurance in the CGA arena is very useful and sometimes a better long term option for a charity.  Could work similarly here for CRTs.

The main thing is to have advisors who knows CRTs and who know commercial annuities – real knowledge, not just faking it.

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.