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good afternoon i'm christina colo and thanks again for joining us for another lunch and learn webinar today we're going to be talking about charitable remainder trusts how to add a new tool to your belt now in this talk today i want to go over some of the nuts and bolts and basics regarding charitable remainder trusts and then we'll get into some more bells and whistles and some different uses for these types of trusts at the very fundamental level a charitable remainder trust is a split interest trust in that part of the trust is held for the benefit of charity the other part is held for the benefit of one or more non-charitable beneficiaries now overly simplistic a charitable remainder trust is such that the charity is entitled to the remainder of the trust so a basic form of charitable remainder trust will provide that for a term of years that does not exceed 20 years or for the life of one or more beneficiaries a non-charitable beneficiary will be entitled to a certain number of payments and we'll talk about the variations on the types of payments while the charity will be entitled to receive the assets remaining in the trust after the term contrast this with something known as a charitable lead annuity trust or charitable lead unit trust which has the the different interests flipped whereas an elite trust the charity is entitled to receive distributions from the trust for a certain term of years and thereafter assets are held for non-charitable beneficiaries so today we're talking only about charitable remainder trusts and as i said charitable remainder trust can provide for a term for a non-charitable beneficiary really based upon either the life of one or more beneficiaries or a term not to exceed 20 years now that the donor can decide to select a charity up front they can retain the right to change the charity that will receive it after the term um and the idea here is that that will not jeopardize the income tax deduction because when assets are transferred to a charitable remainder trust there's an actuarial calculation and that calculation is based upon the irs promulgated interest rate and the terms of the trust so that the present value of the remainder interest based upon the assets that go into the trust the value of the assets hypothetically determined as of the contribution date will determine the value of the remainder interest and that will allow us to determine the income tax deduction and any estate or gift tax deduction to the trust and i'll get into some mechanics of how that's determined now the charitable remainder trust is tax-exempt it's not a section 501 c 3 entity but the trust itself does not pay tax however when distributions are made to the non-charitable beneficiaries income tax is carried out on a worst out first out basis meaning that ordinary income goes out first followed by capital gains followed by accumulated income followed by return of corpus likewise charitable remainder trusts are subject to self-dealing rules um that normally are applicable to private foundations unless no charitable deduction is taken uh at the time of the contribution or during the life of the the trust and you're probably thinking well why would you ever create a charitable remainder trust and not take a charitable deduction well there are reasons and we'll talk about those as we start getting into different layers of complexity so moving forward through slide three you'll see here i've taken an excerpt of internal revenue code section 4947 which governs these split interest trusts and also references uh charitable remainder trusts to provide you with a little statutory basis for these types of trusts so in determining the amount of uh or determining the the type of charitable remainder trust there's really two types there's the charitable remainder annuity trust which is a crap or a charitable remainder unit trust which is a crut and the real difference is as follows a ra an annuity trust a crap specifies a fixed dollar amount for which defines the payments that go to the non-charitable beneficiaries this fixed dollar amount must be at least five percent on an annual basis of the uh initial fair market value of the property but can't be more than 50 percent and again as i said the term of the non-charitable beneficiaries interest must be based upon either up to 20 years if it's a flat term or the life of one or more non-charitable beneficiaries there's another little wrinkle here for a crap you have to meet something known as the five percent probability test and this test says that there must be at least a five percent chance that the trust assets will be exhausted before the end of the term and if you don't meet this test you can't get a charitable deduction and really what this means is that the crap must be structured such um so that the you know the non-charitable beneficiaries aren't likely to receive or don't have a 95 or greater percent chance of receiving all the assets so that there'll be nothing left for the charity a crud a little bit different a crud provides for fixed payments based upon a percentage of the net fair market value of the property under the trust as it's determined each year so just to give you an example a crud can provide for a six percent annual distribution right to a non-charitable beneficiary and that six percent is based upon the prior year's value meaning that every year you have to revalue the assets under the crud to make sure that you can comply with these distribution requirements a neat thing about a crut is that you don't necessarily have to worry about the five percent probability test because every year the payment amount is determined with reference to the prior year's value which means that you're never going to have an issue with the five percent probability test because there's always going to be a decline in the amount of the annuity of the unit trust payments excuse me if the value of the assets of the trust go down now i want to mention that the crotwork and crat can be established during the lifetime of the set lore or upon death so you can have interviews or or a testamentary so you can actually have a charitable remainder trust set up upon the death of the grantor and we'll talk about how that can be useful with respect to planning for retirement plans as i mentioned the charitable deduction is based upon the actuarial value of the remainder interest that goes to charity it doesn't matter what happens under the term of the trust so if you put a million dollars into a crat for example or excuse me a crud for example and it turns out that the performance of the crud is such that you're not going to have any assets left after the uh the uh the non-beneficiary the non-charitable beneficiaries term that doesn't matter it's determined up front and this this five percent exhaustion test is determined up front so if market circumstances are such that you don't have assets left for the charitable beneficiary after the term that's not going to jeopardize your charitable deduction and that applies for both a crud and a credit the interest rate that you use to determine these actuarial calculations is the irs section 7520 rate which comes out every month now one thing you can do is use the rate for the month of funding of the trust or the one of the two prior months and with a charitable remainder trust if you have a lower interest rate that's going to generate a lower charitable deduction so higher interest rates are actually better here if you're trying to maximize the charitable deduction and the amount that can go to cherry now the term of the trust also depends upon also factors into the amount of the charitable deduction and this relates to a longer term generally resulting in a smaller charitable deduction and that makes sense because the longer the term of the non-charitable beneficiary the more payments they're going to receive and the larger their interest so those are considerations and we typically just use a computer program tiger tables is one number crunchers is another program where you just punch in all the inputs and it spits out exactly what the charitable deduction amount would be the amount that's actually expected to go to the non-charitable beneficiary versus the charitable beneficiary now if the non-charitable beneficiary is not the set lore uh then you can have a situation where gift tax might be owed on the the non-charitable portion of the trust and just to give you an example if you put a million dollars into a crud and you run the numbers and you find out well the non-charitable beneficiaries expectation is 70 percent of the of the million so 700 000 and if that goes to say children of the grand then there's a 700 000 gift actuarially and let's say that and i'm just using round numbers here the numbers of course are a little bit different based upon time value of money let's say that the charitable share is 32 well then you have uh a charitable deduction equivalent to 320 000 but you still have that gift of the term interest whether it's based upon a term of years or lifetime of of a beneficiary and here on slide six we have just a couple of distribution percentages that are actually determined um based upon these pro these calculations and these numbers are something we ran back in february i believe and we were doing a lot of research into using charitable remainder trusts for iras and retirement plans and we'll get to that here in a few minutes so the numbers might not be current but looking at this you'll see that if you have someone who's 30 years old you know the maximum amount that a crud can pay out uh to meet this 10 test and this 10 test is that the charitable beneficiary must have an actuarial actuarial expectancy of at least 10 percent of the value of the assets going in and if you base it on someone's lifetime if they're young enough that 10 test could be flunked and we found that if if the non-charitable beneficiary was 28 years old roughly then you would flunk that 10 test in which case you would have to use this 20 year up to 20 year term of years and these percentages show the amount that would have to be distributed each year from the crud in order to meet that ten percent and these amounts are maximum amounts i should say uh you know you have to distribute at least five percent for a crot um but you know based upon that ten percent remainder and the actuarial calculations these are the maximum amounts that can go out to the non-charitable beneficiary and of course the more individuals that you add as non-charitable beneficiaries the lower that maximum becomes because the life expectancies of more than one beneficiary are longer than just one beneficiary based upon actuarial tables so something worth considering so crafts are generally used in a lot of situations and one of such situations is to avoid possible capital gains tax on the sale of an appreciated asset and this would involve putting in a an asset maybe worth a million dollars here that's appreciated before it's liquidated or sold uh to have the capital gains occur under the trust and as i mentioned charitable remainder trusts are not subject to tax themselves but when distributions come out tax will be passed on to the non-charitable beneficiary so in this spreadsheet here you'll see that if you put this million dollars into the trust and each year you know it makes payments based upon 10.8 percent of the balance this is actually a unit trust a crud at the end of the 20-year term which you have uh the family receiving about 2.2 million see in the bottom right corner there and the charity is going to get uh about 566 000. now the 2.2 million there is the cumulative of the distributions received by the family after the tax is on the distribution so that's a that's a cumulative amount it doesn't necessarily factor in time value of money it's more of a nominal basis and then you'll see that the charitable entity receives about uh you know 566 000 now if no planning was done you'll see on the next slide here the family you know if this is by the way if the million dollar asset was sold and the tax was paid the family would receive after 20 years about 1.458 million so quite a bit less the family can really derive a nice benefit from using this type of structure if you have a an asset that's going to sell and generate a lot of capital gains taxes or have a liquidity event it's a very beneficial type of technique and a lot of your clients might like it even if they're not necessarily charitably inclined and as i go through here you know these slides i just want to mention on slide 10 we have a summary of what would happen and by the way on slide 9 just to give you some context this is a spreadsheet showing what would have to happen each year so if you didn't do the crud and you just gave the charity each year an amount so that the end of 20 years they received a nominal amount of 566 000 assuming an 8 growth rate um the family's gonna get 1.3 million which as indicated on slide 10 is a lot less than what would happen um under the crud so really really interesting uh plan here to use the crud to defer capital gains tax and you'll see here at the end of of slide 11 uh there's a slot 11 excuse me this is a pictorial chart showing the various differences of uh using the crud versus not using the crop so with anything here in the tax law world we can start adding layers of complexity and now i'm going to add a few more letters to a cut in another word and we'll call it a flip nimcrut or just an imcrud a nimcrut is a net income with makeup charitable unit trust what's unique about this trust is that if you have a normal crut which says every year pay out six percent a year to the non-charitable beneficiary the nem crux can be drafted to say you pay out the lesser of the six percent amount the unit trust amount that is or a fiduciary accounting income that's available for distribution and if there's no fiduciary accounting income or very little fiduciary accounting income the six percent amount doesn't have to be distributed which allows the assets to stay under the crot and essentially cook on a tax deferred basis and this idea of a flip nimcrut allows for a future event to occur to turn this nimcrut into a normal crud where distributions have to start being made and made up in the future uh to the extent that there is available income so with this type of charitable remainder unit trust what you could do is you can set it up so that you have a disregarded llc underneath the trust to own this appreciated asset and the llc serves as a blocker entity a blocker entity in that you know there's no fiduciary accounting income under the trust unless a distribution actually comes out of the blocker entity even though it's disregarded for federal income tax purposes and this is based upon the principle and income act that applies here in florida and in a lot of other states so this blocker llc essentially allows somebody to flip the switch in the future to start triggering fiduciary accounting income to make up payments that's missed which of course allows for the tax deferred buildup of assets underneath the llc now to have this flipped min crud you have to have a triggering event apply under the trust so the trust instrument must say upon the occurrence of this event this triggering event whatever it is which could be a set date or an event the irs has a list of seven permissible events in final regulations we'll talk about those in a second and then upon occurrence of that triggering event you know you would have uh the makeup provisions apply so that the non-charitable beneficiary can receive distributions associated uh with the unit of trust payments that were missed one such triggering event is the sale of an unmarketable security so you'll see in a minute i have a chart that'll show this other llc not the llc that's the blocker that owns the underlying appreciated asset but this other llc that has nominal assets and if a the manager of that llc and the members of that llc sell the llc that event could trigger the nimcrut as the flip event triggering event to cause the income to pass uh through to the non-charitable beneficiaries as promised here are lists of the list excuse me of the triggering events under the regulations so as i mentioned the sale of a non-marketable security uh which can be a corporation llc that maybe has a promissory note from an unrelated party or even marketable securities itself and then independently significant events such as the divorce or marriage of a donor uh the whether the income recipient has a child the death of the income recipient's relative the sale of the the donors principal residents or upon the income recipient reaching a certain age this doesn't appear to be exclusive but you know it's probably best to stick within the bounds of what's prescribed by the irs so just to reiterate what i've just mentioned you have these two flip nim crusts called alpha and beta and this blocker llc that's taxed as a partnership with a trust company as the manager and then this blocker llc owning another asset in this case it's the generically named abc llc which will be sold for what's expected to be a large gain the blocker entity blocks the income from reaching that improv there therefore blocking the requirement that unit trust payments be made out to the applicable beneficiary so alpha llc on the left and beta llc on the right are your non-marketable securities the sale of which will cause this nimcrut or each applicable improv to flip to a normal crud and having to make up the previous payments and one other note here before i move on at the very beginning we have very top i should say we have a dynasty trust creating this and one benefit to doing so is that if you have assets that are out of the client's estate and you're not necessarily looking for the charitable deduction you're just more or less using the crud to defer income tax for sales of appreciated assets that might occur you know you can structure this so that there is no charitable deduction you don't have the self-dealing rules apply so you can engage in transactions with the trusts without worrying about running a foul of the self-dealing and prohibited transaction rules that apply ordinarily to cruts if a charitable deduction occurs so you know as i mentioned this is a very common scenario where we would use this type of situation you know if you have abc company for example with a million dollars and you expect a large gain you know you can structure it in order to avoid the possibility of recognizing the income tax so if you look here on the bottom of slide 18 you'll see with this one million dollar contribution you know based upon this appreciated asset if it's sold at the end of the 20-year term the charity is going to receive about 242 000 uh the family is going to receive quite a bit including a large amount in year 20 because in year 20 we have this makeup distribution that goes out to the the client and and the just so you see beforehand the nominal distributions in years one through 19 uh are there in order to um you know maybe dividends or some other nominal income held by the trust now this shows what happens if the charitable deduction is taken and of course on the front end the family gets a charitable deduction based upon around fifty two thousand dollars due to the actuarial factors if we eschew the charitable deduction you know you have the same results at the end the family gets the same amount about 2.785 million charity gets approximately 242 000 but there's no charitable deduction to the family so the charitable deduction might not be that significant and as i mentioned the primary purpose of this charitable remainder trust is need to exclude or defer federal income tax that might occur with respect to the sale of the appreciated asset as opposed to obtaining this charitable deduction if we didn't do any planning for this family you would notice that you know there's quite a bit of taxes paid here um and and the family would receive quite a bit less than would occur and slide 21 here shows the summary of of those distributions i'm sorry slide 22 shows the summary as to what happens under the various uh techniques that apply various variations of the techniques that apply and in here for those of us who like to see it in graph format you can see that the the family is going to receive quite a bit more uh if you do the nim crud this flip nimcrot as opposed to no planning of course this assumes growth going into the future at rates of eight percent i believe um so you know it's not necessarily a guarantee but in most situations you're going to have a better uh better result for the family if you use the nim crud as opposed to no planning and then in comparing the regular crutch to the nem crop you know the amount received by the charity is going to be a little bit higher and the amount received by the family is going to be a little bit higher if you have the uh nim crud as opposed to the crud and the reason for that is you have this period of time during which you can have the assets under the trust bake on a tax deferred basis as opposed to the crud which requires the annual payment every year come hell or high water but without regard to this this this net income uh make up right now as i mentioned self-dealing you know we talk about this idea that if you take the charitable deduction you can't engage in transactions because the self-dealing rules apply to nim crusts if the charitable deduction is taken i would suggest you know considering what's really the objective in your discussions with the client about how to use this type of trust if they truly want to make sure that they're getting an income tax charitable deduction then you know i think you got a draft for that and you may want to look into a normal type crud excuse me you might want to look into a uh you know as to when to flip the nimcrud or as to how to draft the trust um in order to assure that you get the charitable deduction whereas if the primary purpose is the deferral of income tax associated with the sale of an appreciated asset then you may want to try to not get the charitable deduction uh to leave open the possibility of being able to engage in future transactions with the trusts so now i'm going to jump ahead to slide number 29 and really another use of charitable remainder trusts that has experienced an advent in the last six or so months is in the realm of retirement and ira planning and this is as a result of the secure act those of us who follow the security act know that it's revolutionized ira planning so that no longer are most beneficiaries of iras and retirement plans entitled to stretch out distributions required minimum distributions that is over the beneficiary's life expectancy now most of the time it's got to come out within 10 years unless the ira or retirement plan is made payable to one of five different types of beneficiaries known as eligible designated beneficiaries so we look at my this pyramid here on slide 29 this eligible designated beneficiary pyramid really just shows us the different tiers and favorability of various beneficiary situations the optimal tier is the surviving spouse who is one of those five beneficiaries those eligible designated beneficiaries and the surviving spouse is the the prime tier because the spouse can roll over the ira into his or her own ira they can receive distributions for life expectancy if they'd like they can roll over part of the ira keep the rest as a beneficiary and they can pull it out over life expectancy similar to what applied under previous law tier two as a con is is a trust for a excuse me back to tier one i jumped ahead here in tier one you have these other types of uh eligible designated beneficiaries chronically ill or disabled beneficiaries minor children or a beneficiary who is under the age or excuse me who is no more than 10 years younger than the deceased participant all of such beneficiaries can get the stretch over their life expectancy as beneficiaries now miners are a little bit different because that miners when they hit the age of majority they have to start pulling out distributions and the 10-year rule applies at that point which means that when a minor reaches the age of majority which by the way is determined under state law and can be various can be a variety of anything from 18 to 26 in some states would require that all distributions come out of the ira under the 10-year rule which itself says that everything must come out by december 31 of the year following the year of of the uh death of the participant so if i die here in 2020 well my non-spousal beneficiaries and i leave an ira to let's say my sister who's in her 30s she's she has to pull out um she's entitled to receive distributions uh because she's no more than 10 years younger but let's just say for argument's sake i leave it to um you know a non-minor cousin who's more than 10 years younger than me he would would have to pull out benefits from the ira by december 31 of 2030 so you know that is not as favorable and if there is no designated beneficiary meaning that if i leave it to a normal trust that doesn't qualify as a see-through trust or if i leave it to an estate or to a a corporation then the benefits must come out of the ira within five years so how does this all matter for charitable remainder trusts well one way to do it is to structure it so that the charitable remainder trust can receive benefits here and the remainder trust of course is subject to the five-year rule meaning that everything must come out of the ira over the course of five years however charitable remainder trusts are subject or not subject to income tax therefore when the assets come out of the ira and go to this charitable remainder trust they can be held and the charitable remainder trust can pay to one or more non individual beneficiaries or non-charitable beneficiaries pardon me over a term of years or over the beneficiaries life expectancy so long as the trust qualifies for that 10 percent remainder interest to charity and this is kind of a replicating the stretch that used to occur under prior law this is a really neat tool that we've used since the secure act has come out there's been a lot of literature on this in fact there's so many slides here regarding this technique i'm not going to get to all of them in the few minutes that i have left i do want to mention that ways to get it to the charitable remainder trust you know can occur by directly leaving it to the trust or to a child who can disclaim it with the nine months of death to cause the assets to go into the charitable remainder trust likewise benefits can be left to an accumulation trust which is a trust that can receive ira benefits and qualify for that 10-year rule the trustee of the accumulation trust could disclaim the benefits from the ira so that they go into a charitable remainder unit trust and you get this stretch crud that i've outlined i'm going to jump ahead to really show you uh mathematically how this could work so if you have a taxpayer who dies with a one million dollar ira uh we assume a seven percent rate of return we assume a six percent after tax rate of return and an ira and irs applicable federal rate of two percent under the ten-year rule this million dollar ira after 10 years after tax comes out the beneficiary is going to receive approximately a million to 39. uh the the ending balance at the 20th year and 25th year if the beneficiary reinvests the after-tax dollars on the right side or highlighted about 2.2 million after 20 years and about 2.9 almost 3 million after 25 years if we use this charitable remainder trust after 20 years the the charitable remainder trust is going to have about 450 000 or so left in it to go to charity and the beneficiary is going to have received about 1.96 million roughly uh the beneficiary reinvest the additional amounts thereafter it's about 2.6 million after 25 years so looking at these in comparison to one another the 10-year rule is going to get more money in the hands of the beneficiary that's uh that's that's unequivocal and they're just going to pay the tax however using this charitable remainder trust could cause assets to go to charity that could generate some element of a charitable deduction and can leave less money going to the government so if the client is beneficiary and client beneficia uh charitably inclined excuse me they can use this technique to cause assets to pass the charity and to pass assets to family um you know on a tax deferred basis it may not be the same amount going to the non-charitable beneficiary but overall between the charity and the beneficiary you're going to have more assets being available for the the beneficiaries as opposed to going to the government and you know certainly a lot of clients like that the next slide just the advantages and disadvantages that i've mentioned as to the different types of trust here trusts here whether we use a charitable remainder trust uh or a unit trust to receive the ira benefits and then one other note to point out with respect to a charitable remainder trust in the context of ira assets if the beneficiary is under the age of 28 they're not going to qualify for a lifetime charitable remainder trust so you can use a 20-year term however you might be able to delay funding of the charitable remainder trust under the ira so that it's not funded until the fifth year so the five-year rule applies in the fifth year monies go from a trust to a charitable remainder trust in which case you have it then set up over the life expectancy of a beneficiary uh in which case you might be able to qualify given the beneficiary's age and allows it to work in light of the actuarial calculations so it's a really neat tool for you to use charitable remainder trusts are not necessarily all about the charitable deduction they do have utility as far as tax deferral goes in avoiding income taxes it's certainly worthwhile for you to discuss this with clients even if they're not charitably inclined if the client likes saving taxes and most of our clients do then by all means this can be a very much appropriate strategy and for those of you who have joined our webinars in the past you'll notice a lot of times we give more information maybe some slides on different topics that don't necessarily pertain directly to the subject so for the rest of the slides here i'm not going to go over them but i've included some of our materials on private foundations so you can see some of the restrictions and some of the elements that apply to private foundations as a private foundation could indeed be the charitable beneficiary at the end of the charitable remainder trust and of course charitable remainder trusts in a lot of situations are subject to the same self-dealing and prohibited transaction rules that apply to private foundations so thank you very much for joining us today i appreciate you coming coming out to see this if you have any questions please feel free to email me and we look forward to seeing you again for one of our forthcoming programs have a wonderful day