The nuts and bolts of charitable trusts
When Sports Illustrated writer Doug Looney retired to his mountain home in the foothills above Boulder, Colo., in the mid-1990s, one of his first priorities was to give something back to the University of Colorado, where his dream career began.
“I was just very fortunate to get to write for 22 years for Sports Illustrated, which is not an adult job, and the fact was, it happened because I went to CU,” he says. “I was interested in doing what I could to help them out.”
Looney’s amassed stock in Time Warner Inc., SI’s parent company, had appreciated nicely over the years. He could have cashed it in, paid the 15 percent federal tax on the capital gains, donated what was left to CU and taken a charitable deduction on his income tax.
Instead, Ami Sadler, associate vice president of gift planning for the University of Colorado Foundation, showed him how, by establishing a tax-exempt charitable remainder trust, or CRT, he could donate his full portfolio value tax-free, plus receive a lifetime annuity and a charitable deduction upon creation of the trust.
- The difference between CRUTs and CRATs.
- Split-interest primer.
- The downsides of charitable trusts.
- Minimum gift thresholds.
The difference between CRUTs and CRATs
CRTs come in two flavors. Looney opted for a charitable remainder unitrust, or CRUT, which tied his annuity to a percentage of the fair market value of the donated assets, rather than a charitable remainder annuity trust, or CRAT, which would have set his lifetime payments at a fixed percentage of the donated assets.
Through his CRUT, Looney’s stock was liquidated by the nonprofit CU Foundation, then immediately reinvested into a diversified portfolio. Each year, the trust is revalued. If it goes up, Looney receives more income for the coming year; if it goes down, he receives less. Upon his passing, what remains in the trust will go to the university, hence the name.
Sadler says Looney is typical of donors who want to cheer on their donation and enjoy a small taste of its success, even though they know their gift in trust is irrevocable.
“My experience is, most people prefer to do a CRUT because they’re thinking of this long-term; they have an asset they would like to make a gift of, but they don’t feel comfortable simply giving it outright,” she says. “By making a gift into a CRUT, they are hedging their bets a bit because they are giving away their asset, but they’re also making a provision to receive income back for life.”
Charitable remainder trusts, which were created by Congress in 1969, are classified as split-interest trusts by the Internal Revenue Service because their assets are split between charitable and noncharitable beneficiaries. To qualify for tax-exempt status, they must provide for annuity payments for a period of up to 20 years or for the life of the donor, benefit a recognized nonprofit charity and leave at least 10 percent of the initial fair market value of the assets placed in trust to charity.
Other split-interest trusts include charitable lead trusts, the reverse of a CRT, where the charity receives the earnings for a specified period and the donor or other noncharitable beneficiary receives the remaining assets. In addition, there are pooled income trusts, in which donated assets are pooled and each donor receives income based on their portion of the overall investment pool, after which the remainder goes to charity.
CRTs are a win-win for the charity and donor, especially those who have highly appreciated long-term assets to spare.
Here’s why: Say you have assets, such as stock, that you acquired for $20,000, and now are worth $100,000. If you sell them, you will be hit with a 15 percent capital gains tax on the $80,000 gain, or $12,000. But if you establish a charitable remainder trust, your designated nonprofit charity gets the full $100,000 tax-free to reinvest and you get an annuity of anywhere from 5 percent to 50 percent of the fair market value of the trust property, plus, in the case of a CRUT, participation in the portfolio’s performance.
The downsides of charitable trusts
These win-win charitable trusts are not for everyone, however.
- They are irrevocable. Once established, it can be nearly impossible to undo a charitable remainder trust.
- The payout is largely fixed. Once you determine the percentage of the trust to which your annuity is tied, you can’t change it or access the principal, even if you should suddenly need additional income in the future.
- Unitrust investment risk. If the underlying investments should tank, your annuity income could shrink.
- Charitable remainder trusts can be complicated. Administration of the trust involves holding, investing and distributing trust funds, filing their unique IRS tax returns and state tax returns, and in some states, issuing an annual report to beneficiaries. Typically, the trustee is a bank, a trust company, the charity or even the donor. Warning: It can be time-consuming and difficult to serve as trustee without knowledgeable guidance.
“It’s really important to get a savvy and reputable trustee, because it can be really complicated,” says Sadler. “The tax situation around the income that comes out of a charitable remainder trust is taxed on a four-tier tax system. It’s a very, very complicated thing for a trust manager to manage.”
Minimum gift thresholds
Thomas Ray, a St. Louis attorney and author of “Charitable Gift Planning,” says charitable remainder trusts hold a special appeal for baby boomers.
“I think the boomers don’t trust institutions,” says Ray. “Their parents, the ‘Greatest Generation,’ were willing to just make a gift and let the church decide how to divvy it up. Boomers don’t do that; they want to know where that money is going, how it’s going to be used. They are just as generous and maybe more so than the preceding generation, but they really want a lot more control over the way their dollars are used by the charities.”
In terms of minimum gift thresholds, CRTs fall somewhere between the stratospheric giving levels of foundations, from $10 million to $20 million, and supporting organizations at $10 million, to the downright affordable donor-advised funds at $10,000 or more, and charitable gift annuities, fom $10,000 to $25,000.
“What you have to consider any time you create a trust is whether the trust has sufficient assets to cover its expenses and still provide a benefit for the beneficiaries,” says Ray. “The rule of thumb now is that you shouldn’t do a charitable remainder trust unless you’re going to put at least $100,000 of assets into it. For a charitable lead trust, you’re talking more in the $250,000 to $500,000 range.”
Though he declined to be specific about the cost to establish a CRT, Ray agreed that attorney fees could be less than $5,000, depending on the assets involved.
Looney is pleased that he backed his beloved alma mater with a gift that keeps on giving — to him.
“Overall, the gratitude I feel for CU is not negotiable. The University of Colorado can’t revoke the education they gave me, so let’s be fair about it. The key is for the donor to just enjoy doing it. To me, if giving money isn’t fun, there’s no reason in the world to give it away.”