All posts in Funding Trusts

08 Apr

New Rules Facilitate Funding a CRT With Unmarketable Assets

In Charitable Trusts,Funding Trusts by admin / April 8, 2013 / 0 Comments

Estate Planner May-Jun 1999
A charitable remainder trust (CRT) is a popular estate planning tool for providing an income stream to you and paying the remainder to charity. In addition, a CRT provides you with an immediate charitable deduction and allows you to avoid or defer capital gains tax. CRTs may become even more widely used under final regulations issued by the Internal Revenue Service (IRS) that make it easier to fund CRTs with unmarketable assets, such as closely held stock, real estate and business interests.

Before these regulations, using unmarketable assets to fund a CRT was difficult because of annual payout requirements. CRTs have to pay annually either a set amount to the beneficiaries (referred to as charitable remainder annuity trusts or CRATs) or an amount based on a percentage of the value of the trust’s assets that year (referred to as charitable remainder unitrusts or CRUTs). CRUTs may also use an “income exception” method of payment. Under this method, the unitrust amount is the lesser of the fixed percentage of the trust’s value or the trust’s annual income. A variation of this method allows the trust to provide that any shortfall from years in which the income of the trust was less than the fixed percentage of assets can be made up in later years in which income exceeds the fixed percentage (referred to as net income makeup charitable remainder unitrusts or NIMCRUTs).

Flip CRUTs

As noted, in the past funding CRUTs with unmarketable assets was often not practical. If the donor chose an income exception method, payments might never be made to the donor if the assets did not produce income. If the donor chose the fixed percentage of assets payment method, the trust would have difficulty making annual distributions of a portion of assets that were unmarketable, both from a valuation and mechanical perspective.

Under the final regulations, it is now easier for the donor to have the best of both worlds. The final regulations provide rules for a trust to convert from an income exception method to the fixed percentage method. These trusts are known as “Flip CRUTs” and they allow the donor to contribute unmarketable assets to the trust and, in effect, defer the annual payments until a later time at which regular payments will be made.

The conversion under a Flip CRUT may be caused by specified triggering events that must not be within the control of the trustee or others. Allowable triggering events include the sale of unmarketable assets or an event such as marriage, divorce, death or the birth of a child. Impermissible triggering events include the sale of marketable assets and a request from the recipient that the trust convert to the fixed percentage method.

Other Concerns When Using Unmarketable Assets

Although the final regulations make it easier to create a CRT with unmarketable assets, some difficulties remain. For example, the value of unmarketable assets held by a CRT must be determined either by an independent trustee or through a qualified appraisal. Also, in connection with a NIMCRUT, any makeup amount from shortfalls in prior years is forfeited at the time of the conversion.

The final regulations also clarify some other issues relating to CRTs. For example, the annuity or the unitrust amount must be paid within a reasonable time after the end of the tax year in which the payment is due. Further, for CRUTs using the income exception method, special valuation rules as to transfers of interests in trusts apply to unitrust interests that are retained by the donor (or a member of his or her family). They are given a value of zero when a noncharitable beneficiary of the trust is someone other than the donor or the U.S. citizen spouse of the donor.

Easier Estate Planning

Charitably inclined donors who hold unmarketable assets should consider creating a Flip CRUT now that the final regulations have made using this method easier. We would be pleased to discuss with you whether a Flip CRUT is right for your estate plan.

08 Apr

Avoid the Funding Trap for Trusts — Control Taxes by Monitoring When and Where Assets Go

In Asset Allocation,Funding Trusts by admin / April 8, 2013 / 0 Comments

Estate Planner Nov-Dec 1997

Estate planning focuses on transferring your assets as you desire while minimizing estate taxes. Although you may set up several trusts to achieve these goals, you might not consider the tax impact of how and when assets pass to each trust. The actual funding of these trusts, however, can greatly affect the amount of taxes due and how much goes to each beneficiary. The following example illustrates the potential impact.

The Estate Plan

John and Georgia were married, and each had significant assets. They structured John’s estate plan so that their two children would receive something on his death even if he died before Georgia. The will allocated:

  • John’s $1 million generation-skipping transfer (GST) tax exemption to two trusts — $500,000 for each child.
  • 50% of his gross estate, after debts and expenses, to a marital trust.
  • The remaining estate, after distributions and estate taxes, to the children.

Execution of the Plan

On John’s date of death, June 1, 1997, his estate was valued at $10 million. Debts and expenses were $100,000. The estate would be divided as follows:

  • GST tax exempt trusts: $1,000,000
  • Marital trust: $4,950,000
  • Federal and state estate taxes: $2,170,500
  • Children’s share (residue): $1,879,500

How John’s will was drafted, the timing of funding the distributions under the will, and the change in the value of assets from the date of death to the date of funding all could affect the plan and result in unexpected or unintended consequences.

Unexpected Capital Gains

For example, assume that John had the assets listed in the box below and the distributions were not funded until Dec. 1, 1998. If the will specifically stated that the distribution to the GST trust was to be a pecuniary $1 million, and the executor used the X Corp stock to satisfy this distribution, the simple act of funding the distribution would produce a capital gain to the estate of $500,000. This would result in a capital gains tax of approximately $100,000, leaving less remaining in the estate for the children.

If John had the same assets, but funding occurred closer to the date of death with the Y Corp stock and one-half the X Corp stock, no gain would occur, and significant appreciation would enure to the benefit of the GST trusts.

Unintended Valuation Effects

Valuation issues also can play a role. If, under the prior example, the executor was required to fund the marital trust using date of death values, waiting to fund might result in serious overfunding of the marital share. This would leave little, if anything, for the residuary beneficiaries after all taxes and expenses had been paid.

Thus, if the Business Z asset was used to fund the marital share, Georgia would receive $6.5 million in current assets and the children would be left with $829,000, less any tax that may result from having to sell assets to pay estate tax. This not only might be undesirable, but it also might cause a rift between the surviving spouse and the residuary beneficiaries.

Monitor Funding To Avoid the Unexpected

While you can’t always control the post-death appreciation or depreciation of assets, closely monitoring the funding situation can avoid the unexpected. If you would like more ideas on funding your trusts effectively, we’d be glad to help.


John’s Assets Date of Death Value Date of Distribution Value

Publicly traded X Corp stock $ 500,000 $ 1,000,000
Publicly traded Y Corp stock $ 750,000 $ 1,000,000
Interest in closely held Business Z $ 5,000,000 $ 6,500,000
Investment real estate $ 3,750,000 $ 2,000,000

TOTAL $ 10,000,000 $ 10,500,000