Joseph Pickering, a
stockbroker, has an older client, Iris Harper, who has expressed an interest in
contributing her stocks to an annuity trust to benefit her college’s endowment
fund.
What are the problems with the
scenario above? Firstly, a CRAT may
accept assets just one time. Having those
contributed stocks appear in her charitable remainder trust account over a
period of days is a serious problem, as it would require the use of multiple
annuity trusts, and that is not an economical or practical way to plan. If there’s any uncertainty about the timing
of contributions, either consolidate the various brokerage accounts first into
a client’s non-CRT account before making the contribution to CRAT or use a CRUT
that is drafted to allow additional contributions. Stockbrokers are not the only ones to make an
error like this; an attorney once clipped a $10 bill to the document and
memorialized its funding in the trust language; that
made it impossible to make an additional contribution to that CRAT. The second major problem is with the sale of
the stock and contribution of cash proceeds to the CRT by the broker trying to be paid on one last transaction before he lost the
account. That triggers taxable gain for
Mrs. Harper and happens too often for it not to be a concern for brokerage
firms that wind up paying for those errors.
Recognize that the funding mechanisms are difficult and create a plan so
that multiple brokers, are aware that errors occur when each one is off doing
his/her own thing – this uncoordinated approach is dangerous, so find a way to
get everyone on the same page
In most states, prudent investor rules govern the
investment philosophy of the charitable trust.
Jeopardizing investments or assets that produce unrelated business
taxable income are choices that the trustee might make that cause an otherwise
exempt trust to become a complex, taxpaying entity. Other problems appear during the drafting
phase that may cause trust disqualification include language allowing the
trustmaker to require certain investments inside his/her CRT. [§1.664-1(a)(3)] For example, a requirement that the trustee
buy tax-free municipal bonds, a specific mutual fund, or any other restrictive
investment is a problem, and may convert the tax-exempt trust to taxable grantor
status. [§675(4)(B)] However, for trustmakers with strong concerns
about having their trust invest imprudently or in “immoral” investment products
(e.g., gambling, tobacco, weapons, liquor, pornography, etc.), it is
permissible to restrict investments in such a way as to preclude the use of
those stocks. Additionally, trustmakers
may also express a preference that is non-binding on their trustees for types
of investments, e.g., tax-free bonds, socially conscious funds, etc. [GCM 37645, PLR 7913104]
© 2002 -- Vaughn W. Henry
Gift and Estate Planning Services
217.529.1958 -- 217.529.1959 fax
