Charitable Remainder Trusts

FLIP CRUTs Gaining Momentum?

avoid-capital-gainsI have only worked on a few FLIP Charitable Remainder Unitrusts (FLIP CRUTs) in my career (at least ones that came to fruition) and all of a sudden in the past few weeks, I am working on one and talking to a former client about another. I don’t think two FLIP CRUT situations makes for a national trend but they both raised really interesting quandaries, stuff to think about in case you ever get to work on one of these.

Just in case you forgot (or never knew), a FLIP CRUT is a charitable remainder unitrust which has two payment periods. The first period is when the trust is funded (most likely with real estate or other not readily marketable assets) before its assets are sold.  During this period, the donor receives the lessor of the trust income or the Unitrust percentage (% times the principal).  The second period starts on the January 1st in the year following the sale of the assets – the income beneficiaries from that point forward are entitled to typical unitrust payments.  There are primarily for real estate or unmarketable assets being put into a CRT.

So why this post?  A few interesting questions came up very quickly in both situations that are important for us to be aware of (and to watch out for!).  #1 – one of the properties has a business interest (happens to be some sort of agriculture) operating on the property where the current owner’s rent is in some way tied to the production on the property.  The donor’s counsel, as well as other counsel, weren’t that concerned but there is a potential problem there.

If the owner of the property looking to put it in the FLIP CRUT has more than a landlord/renter relationship with that farmer, then that farming enterprise income is considered UBI (Unrelated Business Income) to the FLIP CRUT (once it becomes the owner).  And, the IRS’s brilliant rule regarding UBI in a CRT is a 100% tax on any UBI in a CRT.  In other words, the IRS confiscates any UBI you might have in that trust.  Not the end of the world, by the way, but certainly annoying!

Next issue.  One of the potential buyers of one of the properties is also buying a business interest from the same donor (separate and apart from the real estate going to fund the FLIP CRUT).  The buyer of the business interest wants some sort of legal guarantee on his potential purchase of the property intended for the FLIP CRUT.  That is what we call a prearranged sale – a big “no-no” for CRTs.  No contractual agreements can be in place with a potential buyer prior to the donor putting the real estate into the FLIP CRUT.  Otherwise, the donor is not entitled to his avoidance of capital gains and probably other bad stuff.  Not worth testing these waters – don’t engage in any contracts regarding the intended property for a FLIP CRUT prior to the funding of the CRT.

Lastly, one of the situations was in “full-steam ahead” mode because they felt that they had a buyer willing to buy the property next year (not legally bound but enough to give them comfort that the property would be liquidated soon enough).  Well, they realized that this particular buyer might actually have trouble being able to buy the property.  I always warn donors of the possibility for unforeseen events happening, and having a FLIP CRUT own and manage property for more than a year is certainly something that could happen.

Of course, a CRT being stuck with unmarketable property can be a disaster as eventually the property has to be sold and quite possibly at much less than everyone expected.  Never a good thing with donors who may end up blaming the fundraisers who encouraged this gift option.  Always spell out the potential negative consequences of any gift like this in advance, and preferably in writing (in a nice way but one that is clear enough that you can pull it out of the file to defend yourself if need be).

While two CRTs coming across my path isn’t so earth shaking, I suspect that people are finaling gaining more comfort with their investments and starting to look for options to avoid capital gains.

Have an interesting gift planning scenario?  Please share with us and we will repost (facts altered, of course).

Are people that gullible? Trashy article on Mitt’s Planned Gift fools too many!

I was hoping to show how Mitt’s 1996 CRUT (click here to see previous post for background) would have passed the 1997 law change but failing there, I am sadly stunned at how this little blip of dishonest journalism somehow made the rounds throughout the internet.  And, sadly, most outlets bought into’s skewed journalism.

Well, for the planned giving world, here is how Mitt’s CRUT looks on paper.  Assuming a $1 million funding (my guess as it must have been close to that amount) in June 1996, here are the basics of a simple gift illustration that I could pull from Mitt’s public disclosures:

Income beneficiaries: ages 49 and 47

Unitrust rate: 8%

Income tax deduction:  $73,590  (7.4% of gift principal – not that far off than the 10% required under 1997 law )

Toss in the 2000 tech stock crash, 2001-02 post 9/11 recession, and the 2008 to present prolonged recession – none of which would have been known in 1996 – no wonder the trust principal has suffered.

Ask yourself this:  Did Congress seek to stop this type of gift in 1997?  No, Congress was looking to stop Jonathan Blattmachr’s 80% CRUTs and other brilliant push-the-envelope ideas that he was coming up with.  Just ask him.  Honestly, he is brilliant and we need guys like him to challenge and embarrass the IRS.  But, I found it very disingenuous for the article to be quoting him when my guess is that he would  probably be rolling in laughter at the thought of an 8% CRUT being an aggressive tax move.  Try 80% payout CRUTs and you might get his attention.

The point is this: had Mitt created a 7% CRUT in 1996, he would have been right around passing the 10% rule.  But, financial advisors in 1996 would have been telling him to go with 8% or higher because that is what advisors were saying then.  It is so obvious that this whole story was cooked up to pin a “tax evasion” smear on Mitt.  And, sad that so many picked the story up without questioning its honesty.

By the way, the same 2007 disclosure that used to attack Mitt Romney also mentioned that Mitt Romney waived his 2006 governor’s salary.  Conveniently, failed to report that fact.  If you want to see that one for yourself, click here!

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:

Remembering the Spring of 2009 – Let’s not forget the risks involved in Planned Giving

I know I promised a NY Times/WSJ style article to my blogosphere readership – that will take a few days.  In the meantime, I came across an interesting presentation that is worth sharing.

While looking at my cluttered computer desktop last night, I opened a presentation that I gave to the Philanthropic Planning Group of Greater New York in May of 2009 with a colleague and some reinsurance people from The Hartford.  A really interesting presentation and still relevant today.

Here is it: Planned Giving Day presentation on crashing stock market and CGAs

This was done at the height of the crashing stock market, CGA programs were buckling under unheard of market losses, and we really had to wonder if the field of planned giving would ever be the same.

Anyway, why should all of the work we put into this presentation disappear into the annals of computer memory.  Check it out and post questions on it here!

And, believe it or not, under the right circumstances, I believe that reinsurance of CGAs (and possibly CRTs) actually works better than “self-insuring” (keeping and investing) for most CGAs/planned giving programs.  Just don’t ignore my “under the right circumstances” caveat.