Charitable Remainder Unitrusts

Finally, Planned Giving Gets into the Presidential Campaign!

Just when I thought that I wouldn’t have any topics to blog on until after the election, Planned Giving jumps to the forefront of the presidential election campaign!

I am going to provide the link to the article about Mitt Romney’s use of a charitable remainder unitrust (CRUT) found on this week but I have to preface the link with a few comments:  this is the worst reporting on the charitable arena that I have even seen.  Complete garbage.  The article starts out by calling charitable remainder unitrusts “a popular tax shelter” – implying that is abusive – at least that is the clear message readers get.

Of course, that is complete insanity for anyone with knowledge of this field.  Yes, there were a handful of abusive planners who tried to take advantage of some holes in the law – which were promptly closed by the late 1990’s.

And, to destroy any credibility of the writer and editor, their prime source in the article is none other than Jonathan Blattmachr –  the well-known planned giving outlaw who created the abusive practices that Congress had to shut down.  Sure, if you interview a mafioso, he’ll tell you that killing and stealing is just a part of a day work (for him, but not for me!).  Seriously, this guy has no credibility to be talking about an alleged scheme –  if he was being truly honest for this article, he would explain why Mitt’s CRUT was NOT one of his own abuses (see end of blog post for my own analysis).

Trust me – whoever is reading – only a handful of planners ever did the stuff that Blattmachr came up with that was abusive.  And, from the bits and pieces of info that they found for the article, I can tell already that Mitt’s CRUT was not one of the abusive schemes that involved CRUTs.  The fact that it still has funds in it – after multiple and prolonged recessions – is all the testimony we need.  Hundreds, if not thousands, of charitable remainder trusts have not fared so well.

Ok, so here is the link:

I know it is just politics and writers looking to dig up dirt before their guy loses a close election.  This one just seems insanely incorrect in its accusations.  In fact, the article posits that Mitt’s CRUT only projected a charitable remainder of 8% of its initial principal at the time of its funding.  Excuse me – the writer didn’t actually have the full funding amount or date of funding!    Based on what they do have (end of 2011 principal of $421,201 and a 2011 payment to the Romney’s of $36,696), we can guess that the CRUT rate was probably 8%, max 9%.

Little lesson in planned giving history:  the abusive trusts that Blatt-idiot was promoting in the 1990s were paying up to 80% of their principal to their donors.  8% or 9% CRUTs?  Not only was that a standard (even a low rate for those days), but it even completely acceptable for CRUTs created today.

In other words, the writer was bluffing when he wrote that Mitt’s CRUT had only an 8% charitable remainder projection (2% lower than today’s legal requirement).  He doesn’t have that information and can only be guessing.  Anyway, it was clearly legal at the time and not an abusive Blatt-trust that Congress set out to close down.

Even though I love the idea that planned giving is making some headlines, I have to admit that this was a difficult piece to get on paper.  I think a video of me ranting and raving about how bad this reporting was might have done a better job.

Good news for the Romneys – no one is paying attention to this story.  Too complex.

And, maybe good news for the planned giving world: we might have a President who a planned giving donor!  Who knows, maybe we’ll get the IRA rollover back and maybe it will include an option to roll into a CRT or CGA?

If you are interested in reading another writer’s disgust about this article and a different perspective on tax planning, check out this post from Taxgirl on Forbes:

CRT Circuses – Beware of Beautifully Drafted CRTs

I am not sure what to call this one.  Read this story about a situation I worked on today – for fun and for learning purposes.

In helping a client work with a donor with an existing CRUT (drafted to allow the donor to adjust the remainder charities), I went back to one of my old tricks – why not have the donor sign a statement irrevocably waiving his right to change the charities?  Usually, I required this if a donor was requesting that my charity take over as trustee (an old New York rule about only being trustee if you have an irrevocable interest).

In recent years, this switching from revocable to irrevocable (on the choice of charitable beneficiaries) has been a nice way to close a new gift or count it in a campaign or for a naming opportunity.

Of course, no one knows exactly how to do this since none of the  usual planned giving resources provide a sample form.  So, years back, I created a form based on one of the standard forms for changing CRT trustees or something like that.  Basically, it looks like an addendum to the CRT and states the facts clearly and has the donor and trustee sign.  Hopefully this addendum stays with the CRT document itself (with the trustee) or it is pretty worthless.  (contact me directly if you are in desperate need of one)

So, I advised a client on this technique a few months ago, gave him the form for the donor’s attorney to use and forgot about it until today when they announced the closing a decent sized CRUT gift. And, then they emailed me for help calculating the present value for counting purposes.

Great, I said.  Just give me the Unitrust rate.  I already had the current market value and the birthdate of the donor.  Turns out, I had a copy of the CRUT on my hard drive so I started looking for the Unitrust rate.

Mind you, this is a 17 page document (about 10-12 more pages than I would have drafted it).  I would venture to say it was beautifully drafted.  All the bells and whistles.

Except one.  Perhaps the most important bell/whistle: THE UNITRUST RATE! I searched and searched – no rate.    The definition section towards the end of the trust said that the Unitrust Amount shall mean the amount described in Paragraph XYZ.2 of Article II – very lawyerly-like.  But when I went back to the referenced paragraph, it said

“The Unitrust Amount shall be the Net Income for each taxable year of this trust.”

Ok folks, never-mind what the value of the new gift is, this is technically not a qualified CRT!

There are a bunch of rules regarding what is needed in a CRT document, very specific, listed in Sec. 664 of the IRS Code.  One of them is just this – you must specify the payout in terms of a percentage (for Unitrusts).  Here is the specific language in 664 defining a CRUT:


For purposes of this section, a charitable remainder unitrust is a trust–

(A) from which a fixed percentage (which is not less than 5 percent nor more than 50 percent) of the net fair market value of its assets, valued annually, is to be paid, not less often than annually, to one or more persons (at least one of which is not an organization described in section 170(c) and, in the case of individuals, only to an individual who is living at the time of the creation of the trust) for a term of years (not in excess of 20 years) or for the life or lives of such individual or individuals,”

What threw this drafting attorney off, besides the fact that he clearly missed one of the most basic requirements of a CRT?

This was supposed to be a Net Income Unitrust (i.e. paying the lesser of net income or the Unitrust percentage).  From the facts (most of which I can’t disclose, of course), it was clear that the net income from the chosen investments was going to be less than a chosen Unitrust percentage.  Not a bad plan.  I am guessing that the drafting attorney thought that since they would only be taking Net Income, there was no need to specify a Unitrust rate.

Of course, that was wrong.

Consequences?  None at this point.  This trust was already over 5 years old.  That means that more than 3 years had passed since the filing date of the initial tax return and disclosure of this trust (and when you give a copy of the trust to the IRS).  I am guessing no one read this trust because the first thing you look for is a payout rate, when reviewing CRTs.  The statute of limitations on this type of stuff is 3 years – so they are in the clear on that.

What about subsequent tax returns?  Well, if the net income was less than 5% a year, presumably it was, then the K-1 was showing the correct income to the donor.  No harm, no foul.

But, we are still left with a defective trust and I am wondering what they based the initial tax deduction on – that for sure required a Unitrust rate.  Maybe the donor never took a deduction?  Maybe the donor’s accountant presumed that the Unitrust rate was the 5% minimum, in absence of a rate stated in the trust?  Nice logic but with no basis in the law.

I think this was a classic scriveners error and possibly fixable – in a state court which inevitably would go along with it (regardless of the IRS issues on this one).

The whole story makes me wonder how lax or uneducated IRS agents who review these things are.

Also, reminds me how uneducated most attorneys are in this area.  Actually, as I took one last look at this 17 page monstrosity, what a botch up it was.  It says that any Net Income in excess of the Unitrust Amount shall be added to principal, but never actually states a Unitrust Amount outside of saying it is the Net Income. In other words, it is saying any Net Income in excess of the Net Income shall be added to principal – get that one.

Planned Giving Ethics – Merrill Lynch Case Part 1

As mentioned last week (see ), there was a recent court ruling out of the State of Delaware regarding a really botched charitable remainder trust situation.

Rather than trying to review the entire case in one post, I plan on writing short posts related to the many ethics issues raised in the case. In other words, I think the case itself is great for training purposes – getting accustomed to the nuances that we planned giving officers should be aware of, but the ruling itself should have little or no impact on the field.

If you try reading the case (, you’ll see some nice biographical info on the victims but here is my short version (at least the relevant facts):

Husband and wife (she is 75 and he is 10 years or more older) save over $800,000 in Esso/Exxon stock from his career, their nest egg. At some point, the husband comes to rely on a Merrill Lynch broker and instructs his wife (not typically involved in the family finances) to stick with this guy’s advice when his health starts to deteriorate. Sadly for this family, the wife listened to her husband on this issue and followed the advice of the Merrill broker to put their entire Exxon stock nest egg into a 10% Charitable Remainder Unitrust (CRUT), income for lives of husband and wife, and then to their 3 children, before eventually distributing remainder funds to 5 charities in approximately 50 years. This was finalized in 1996, before the 10% remainder rule came into effect – their deduction on this $840,000 CRUT was less than $10,000.

The first lesson: A Merrill Lynch stock broker, or any other stock broker or insurance salesman or financial planner, is NOT YOUR ESTATE PLANNING ATTORNEY. Even if he has a law degree or even practiced estate planning law. He is a salesman who is selling products or investments. Your attorney is someone who represents only YOUR interests, not the interests of the commissions to be had from selling various products to you.

In other words, beware of Merrill Lynch guy’s estate planning advice.

In truth, this also applies to planned giving officers.

The take way for planned giving officers is to remember and communicate that donors need independent counsel, their own attorneys, to review various plans that have any impact on a donor’s estate. Educate your donors not to rely on you or their Merrill Lynch stock broker for estate planning, especially significant parts of an estate.

To be continued.