Charitable Remainder Trusts

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.

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.

Planned Giving Nightmare CRT Case

This new legal ruling is for the die hard planned giving folk out there:

I haven’t spent enough time on it to give readers my summary and my uptake but from my first glance, it’s a real doozy of a fact pattern.

Here is a glimpse and a quote from the introduction of the opinion: A Merrill Lynch broker

“advised an elderly woman to place most of her life savings in a charitable remainder unitrust with a 10 percent annual payout, lifetime gifts to her children as successor-beneficiaries, and the remainder to go to five charities, an event expected to occur almost half a century later — objectives that all now seem to agree and understand were unrealistic and likely unattainable. In the spirit of cross-selling, a trust company sister entity of the brokerage firm was designated trustee. Legal advice was provided by an attorney selected by the brokerage firm; the attorney never even spoke with her client, the trustor.”

I think this case will be a spring board for a series of blog posts on ethics in the planned giving area!