Charitable Remainder Trusts for Beginners

I can leave comments again! Awesome. Very nice write-up. I have nothing else to say really, just glad to be able to respond again.

Did you ever figure out what was happening? I couldn't find anything on the administrative side that was causing it.

So, how is the income from this trust taxed at the individual level?

If I had set up the trust with $7.5 Million in SBUX stock, and received $375K/year, is that taxed as ordinary income, dividend/capital gains etc?

The complaint against Mr. Romney's use of CRTs to provide a very nice income, tax free, for his adult children was not a legal one, but a moral one: only the wealthy can afford to create a CRT, and only the very wealthy can afford to establish ones that provide a comfortable lifestyle for several children. The tax laws are written by and for those with extreme wealth. People who urn just enough that they get no Earned Income Tax Credit will never benefit from this tax shelter. That, coupled with the relatively low net tax rate Mr. Romney paid on all his income, however legal, comprises the social justice angle.

You don't have to have Bill and Hillary Clinton wealth to create a CRT. Of course, not EVERYONE benefits from this "tax shelter". The main beneficiaries are CHARITIES. Sorry, sunman, that you buy into the class warfare rhetoric. And Joshua, are you sorry yet about your mistake in voting for Obama?

Remember, I'm a policy details guy. This is why I don't like when people say things like, "George W. Bush was a bad President" or "Bill Clinton was a terrible President". No, you need to talk about specific laws and regulations. Bush did some wonderful things (he tried to prevent the housing bubble long before anyone was even talking about it and the Democrats in Congress stopped him). Clinton did some wonderful things (his economic policies, dedication to free trade, and ability to work with mortal enemy Newt Gingrich led to tremendous prosperity). They both did some idiotic things, too, whether it was invading Iraq in the case of the former or deregulating the investment banks in the case of the latter.

It's about the balance between good decisions and bad decisions. The last President you could actually call "good" without any explanation was probably James K. Polk. He kept his promise to only run for one term in office and achieved everything on his promised agenda, from the annexation of Texas to the opening of the Smithsonian Institute.

Understanding that is how I evaluate politicians, from both a personal, household, and a national perspective, given the alternatives that were on the table at the time - which is the only way a rational person can evaluate the attractiveness of his choices in retrospect - and the subsequent economic, stock market, civil rights, and regulatory changes that have been put in place (particularly in regards to the oil industry and the Internet, both of which have benefited me, my family, and our portfolios tremendously), it would be deranged for me to consider the vote a mistake. Were I to be transported back to 2008 and 2012, respectively, knowing exactly what I know now - the good, the bad, and the ugly - I would still have chosen the current President over McCain and, later, Romney. (Though, I suspect, other than civil rights, Romney would have performed roughly as good as Obama did on most of the important big stuff. There really wasn't a lot of difference between the two on economic and military matters despite my distaste for his lack of conviction, which is a product of living on the East Coast for years during the time he was the governor of Massachusetts. Romney was also treated unfairly by members of the Press, who twisted some of his policy proposals and words beyond recognition in a way that went so far beyond intellectual dishonesty, it was outright lying.)

That doesn't mean I like everything Obama has done - far from it! I've been fairly ruthless in my criticisms of some of his proposals, especially when they are just for political theater like his fake proposal to tax foreign corporate profits, which he could have easily passed when his party controlled both chambers of Congress. All in all, however, the policies themselves have been above-average in quality and mostly effective in achieving what they were meant to achieve. If I were a betting man, his historical approval ratings will be significantly higher than they are now when only the data remains.

On that front - the data - he did well considering he entered office on the cusp of Great Depression II. GDP is at an all-time high. Corporate profits are at an all-time high. Federal tax receipts are at an all-time high. The stock market is at an all-time high. Despite its problems, TARP and the associated bail-outs not only saved the country from the worst meltdown in generations, it turned a profit for taxpayers, more than paying back its cost from the warrants, stock option, and preferred shares the Treasury received in exchange for extending funds. The murder, rape, assault, and violent crime rates are at all-time lows. The abortion rate is near all-time lows. Military engagements in the Middle East have been severely curtailed. Drilling permits for oil are at an all-time high. We've become the greatest source of oil in the world, surpassing Saudi Arabia, and are on track for complete energy independence in a few years. The payroll tax was cut for workers (which should have been made permanent). The Internet remains free from private monopoly power (it's astonishing and worrying to me, as someone with so many investments tied to the Internet itself, people don't understand Net Neutrality and the stakes it involved). Aaron and I, who pay far more taxes than most of our fellow citizens, are now recognized as married, entitled to each other's Social Security benefits, able to make medical decisions in an emergency, and the other 1,100+ benefits that come along with it, which would not have happened under a McCain or Romney administration. Approval for the 2nd Amendment and opposition to gun control is near an all-time high since the polls started being tracked a generation or two ago (even if it was opposition to Obama that caused this, I consider the outcome good as I'm a proponent of the right to arm yourself as being a basic, fundamental human right). It's a fairly extensive list. All of these things working together, all of these variables interacting, led to an eight-year period that was far better than any of us could expect.

As for the downsides, many of those were coming, anyway, as we paid the price for our past sins. It's been said that we could have elected a ham sandwich as President and the national debt would have still exploded like it did, which is absolutely true. Had McCain won in 2008, you'd be looking at the same figures.

I've written in the past about how I want a strong two party system; a system of competing ideas where the best rise to the top. We don't have that right now and I think a major reason is the primary process on the Republican side, which needs to be reformed. The way it is structured at present, the best national candidates cannot make it through the special interest groups in Iowa without alienating most of the country or making promises on certain special interest groups that tie their hands even were they to be elected. This leads to candidates about whom nobody is particularly passionate, and who are bruised, battered, and beaten by in-party attacks prior to even going head-to-head with the Democratic candidate. That is not good for society.

Equally worrisome: The Republican coalition itself is now broken. Far from achieving the sort of grand coalition a leader like Ronald Reagan did - a guy who got Democratic steel workers to vote for him under his big tent philosophy of doing what was best for the country - state-level party power brokers have become ideological purists, driving out those who don't pass every litmus test. The Rockefeller and Eisenhower Republicans have been driven into the hands of the Democrats, much the chagrin of the true liberals, who now want someone like Bernie Sanders to become President - and God help us all if that happens. He's an economic disaster waiting to happen if anyone knows anything about even the basics of free markets; elected by people like those well-meaning fools in who want to help the poor, pass rent control, and then wonder why costs of living shoot through the roof in the years that follow as typical families are driven out of the market place entirely, ultimately harming the poor and middle classes most; who conveniently ignore even the most liberal of economists like Paul Krugman writing op-ed pieces saying, "Guys, this is a terrible idea! This is basic economics! Guys! Stop! Really, stop!", because it doesn't fit with their worldview. It reminds me of those people who think the Earth is 6,000 years old. They are not rational. They are not looking at data and trying to make the most intelligent decision they can using real-world facts. They are foregone conclusions in search of evidence; the opposite of the scientific method.

How do you solve that? I'm not sure without structural reform in the party nominating system, perhaps a Borda voting setup. When we were down on that Island visiting friends, one of them - a highly educated, affluent, pro-gun, small-government guy - was talking about how he could not bring himself to vote for Republicans because the party has been hijacked by irrational, anti-science, anti-gay ideologues in the same way certain wings of the Democratic party have been taken over by Tumblr-ina, SJW, socialist moochers who think it's everyone else's responsibility to bail them out of bad life choices. The whole thing is maddening because there exists in this country a wide middle ground of people who just want the government to do its job, stop spying on its citizens, stop trying to cater to lobbyists (e.g., the Kansas legislature almost giving cable companies like Comcast a bill that would make it illegal for a new competitors such as Google Fiber to come into the market, which is about as anti-American and anti-capitalistic as you can get), and leave everybody alone to live their lives; the people in the middle of the horseshoe who don't want some central authority determining how we can live, and what we can do.

One thought - The large science/tech investment in the 60's seems skewed by the fact that NASA had a large chunk of that budget and it wasn't cut until we accomplished the original goal of a moon landing. Had JFK not been killed, would we still have seen that level of investment continue for a decade? Or just a few years?

I agree that the investment was a good thing for society. I wish it would be politically feasible to get us there again.

It always make me sad to think that in my lifetime, no human has left LEO. And it will probably be another decade before someone does again.

You are, at least, an intellectually honest guy who can have a civil discussion. I did not say that Clinton was a "bad" President. My reference to Clinton was simply a pointed response to sunman absurd claim that "only the wealthy can afford to create a CRT." I can't change your 2008 and 2012 votes for Obama, and it wouldn't make any difference anyway. I can see voters taking a chance on "hope and change" and "healing the planet" in 2008, but when reality stared voters in the face in 2012 I am amazed that a thinking person such as you would violate the Who's famous song and "get fooled again."

Obama had a great get out the vote campaign on the internet (I got about 5 emails a day, encouraging me to donate $5 and to support "The One." He also succeeding in a dishonest campaign of demonizing (aided by a compliant media) a truly decent man who could have done a whole lot better than we have gotten from Obama. Obama and Harry ("he didn't win, did he?) Reid are "ethical" soul mates.

I did not say that Clinton was a "bad" President. My reference to Clinton was simply a pointed response to sunman's absurd claim that "only the wealthy can afford to create a CRT."

You're absolutely right. I didn't mean to imply otherwise, it was intended as a general observation about some of the types of questions I've received over the years. Re-reading the conversation, I can see how it might appear I was reacting specifically to you in that passage, which is my fault as I could have phrased it better. When I wrote it, I was abstracting some of the general sentiments that have been sent my way for the sake of efficiency. I apologize for the lack of clarity on my part as I didn't mean to give the impression of ascribing a particular opinion to you.

I see, if a Democrat talks about inequality of opportunity, it's "class warfare," the Republican buzzphrase straight from the 1930's as they railed against "that man in the White House." Didn't hold water then, doesn't hold water now.

We're out of two wars the Cheney-Bush maladministration started, with no cause in the case of Iraq, the deficit brought on by wars and the wild men on wall Street has been reduced, and millions of human beings (to say nothing of their being our countrymen) who had no access to healthcare outside the ER of generous institutions have health care --- so yes, I'm very happy indeed I voted for President Obama twice. Considering the loonies who've announced for the Republican nomination so far, and the degree to which they pander to fear and hatred, I can only hope that Americans will once again chose wisely when they vote in November of 2016, as a counterweight to the "I'm no scientist" servants of obscene wealth (I'm looking at you, Koch bros. and Mr. Adelson) who populate the House now.

And it would take a cleverer person than you to twist reality into wonderland and make me believe charities benefit more from CRTs than the offspring of the wealthy in whose behalf they're established. Read the applicable law. The charities only get 10% of the fair market value of contributions to the trust at the time they're deposited. The other 90%, and any growth over time, goes to *ding* the rich little kiddies.

I haven't seen recent figures (don't know who many $500K speeches) Slick Willy has been giving), but the Clintons are worth ~ $100M. Nothing like having been President to allow you to command enormous speaking fees, as Ronald Reagan first established. Mittens and Ann are worth about $250M, after all the wealth-hiding mechanisms have been set in place. The Clintons have a foundation, though they'd get into legal trouble if they stuck their hands in that till.

Repeat: It's NOT "class warfare" or any other 90-year-old Republican talking point to resent the privileges extended only to the uber-wealthy in this country. Particularly in the case of hedge fund managers, they've done too little for their fellow countrymen to deserve it. (I might make an exception for Romney because of his generous charitable donations, were they not mostly to his own church... on the other hand, the LDS church has actually done something substantial about homelessness in their capital city, so that's not necessarily a bad thing.)

(I realize this was written to me but I'm working late and happened to see this exchange. Forgive me for the interruption but I thought it might be helpful to you.)

I think you have a misunderstanding about how CRT's work. When you say, "The charities only get 10% of the fair market value of contributions to the trust at the time they're deposited. The other 90%, and any growth over time, goes to *ding* the rich little kiddies.", this is incorrect.

Rather, 26 U.S. Code § 664 requires that if the trust property falls to 10% or below of the original value before the lifetime income beneficiary has died, it must terminate and all remaining property immediately go to the charity or, if it doesn't meet that threshold in the first place, it doesn't qualify at all. Most trusts actually grow in value and end up leaving the charity much more than the original property value due to the nature of compounding (e.g., a 20-year trust with a 3% distribution schedule and an 8% compounding rate is going to turn a $10,000,000 starting value into $26,532,980 for the charity). If a family did, for some reason, want to structure it so only 10% went to charity, the tax deduction and shelter they'd receive is adjusted accordingly. Likewise, for a family that sets up one of these charities then has the income beneficiary die straight-away, they're probably going to be in a materially worse position than if they'd just gifted the property outright.

There is no "gotcha" here. This is something Democrats and Republicans have long used to supported because they benefit the charitable causes much more than the children of the wealthy.

If you doubt it, consider that there are far more efficient mechanisms for a rich family to make intra-generational transfers than the CRT, including things such as the stepped-up basis loophole, low-cost fixed loans for asset acquisition, or claiming liquidity discounts on limited partnership units that hold baskets of securities (perhaps even a combination). That's just the low-hanging fruit. Those other techniques would make it almost effortless to pass millions upon millions of dollars completely tax-free to your children and grandchildren, while this - the CRT - is going only give you a partial write-off. Equally as important, those rich children have to pay taxes on the income from the trust while the principal is growing to benefit charity.

As far as social policy goes, this is one of those things that creates an incentive for families to gift away their wealth so we don't end up with aristocracies like some European nations (e.g., look at the inheritance laws in France - it's practically impossible to gift away your wealth and leave your child nothing). When you look at the data on how the money is gifted, almost all of it ends up in the hands of universities, art galleries, symphony halls, libraries, medical research, and charitable endeavors (poorer rich families are a bit different in that tend to give a lot to churches, synagogues and mosques, too, which then invest in the local community.) It eases the pain of financially-minded people, working on their psychology. "I get to benefit society, help my own family, and lower my tax bill".

To put it bluntly, a rich family will almost always be better off by just keeping the money themselves. Take away the CRT and that's probably what they'll do. It will be the social causes that suffer. That's why this isn't a Democrat vs. Republican thing.

All of that said, there is a set of limited circumstances, at times when Treasury yields are low and certain other conditions apply (which, historically, have been exceedingly rare but we are in such a period at the moment), that a family can use these structures to transfer a tremendous amount of wealth without a corresponding benefit to civilization. The Walton Family is doing such a thing at the moment, I believe. That's a very different beast and most certainly a minority application of a tool that has been a cornerstone of the country's charitable sector for generations.

I see sunman just can't stay on topic, and MUST go off into Bush and Koch land. As an attorney for the non wealthy, I can guarantee that you don't have to have Clinton wealth to set up a CRT. $100,000 (or less) can do it, and attorney fees are way less than BHO's green fees over a weekend.

I also happen to know the law, and the law is that a CRT annual payout cannot exceed 50% and must be at least 5%. The actuarial value of the charity's interest must be at least 10% of the amount transferred to the CRT, and if the charity's interest is that low, then so is the charitable deduction.

And, no, payments to individual beneficiaries are NOT "tax free." Most distributions come out as ordinary income.

And "wealth hiding mechanisms"? You've been spending too much time at Talking Points Memo and Media Matters or MSNBC.

"It's not what liberals don't know that gets them into trouble, it's what they 'know' for sure that just ain't so." As your comment demonstrates, that's pretty much everything.

The diversions from topic were yours, pal.

What is the obvious purpose of a "charitable" trust that requires only 10% of the amount be transferred to the charity? Ipso fact, it's to transfer the great majority to a person who is not the charity, and specifically to avoid taxes such as the estate tax --- a tax that benefits no one with an estate south of $5.43M. Do you deny that the majority of dollars in CRUTs in the United States are placed there to avoid estate tax?

I'm happy for people who have earned that much money, but I see no reason why their success should mean a life of relative luxury for their offspring. A good education, a home, a start in life, sure, but we don't need an endowed nobility in this country.

Anything that hides great wealth from the estate tax is ipso facto a wealth hiding mechanism, whatever you want to call it. After all, it's you folks who came up with "death tax."

And by the way, given the ability of the middle class to save anything for their retirement for the last seven years (at least), a $100,000 trust is pretty much the preserve of the rich folks now. Almost everyone else had to hit their depleted retirement accounts to stay above water.

Obviously, you can't read or understand the most simple concepts. OK....if one transfers only 10% (actuarial value....which you probably don't understand either) to a charitable trust a "filthy rich" person like Al Gore would get proportionately smaller deduction. I don't know whether a majority of dollars in CRUT are done to avoid estate taxes. I do know that a LOT of people do them to reduce INCOME taxes (via a lifetime charitable deduction and avoidance of capital gains by transferring highly appreciated assets to the CRUT). I fact, I did a CRUT for a man who was going to give money to a major university at his death, but put highly appreciated stock of a closely held business into an inter vivos CRUT. He got income (taxable) from an asset that produced no income (just appreciation) and the university locked in the gift. A win win. But as a liberal, you only like win (government wins) - lose ("rich" person loses) transactions.

So, if you are dissatisfied with a transfer of only 10% to a charity, remember that the evil rich guy could give ZERO to charity (as many rich liberals do). The really rich folks don't pay any estate tax. They set up foundations (like Bill Gates, Warren Buffet, and the Clintons).

I agree with you on one thing: I agree that an individual's success should not mean a life of luxury for offspring. Bill Gates has it right on that score. He will leave his offspring with only a few million from his billions. And I know that many families (like the Kennedys) do their offspring no favors by leaving them millions. But where I differ with you is that I believe that is a decision that should be made by the person who made his or her fortune.....not liberals like you, Obama, Pelosi (now THERE is someone who is loaded but I am sure is doing her darndest to avoid paying as many taxes as she can), and E. Warren.

So now we are condemning people that use legal means to reduce their tax burden? I suggest that Sunman follow up with his elected representative or political action group or god forbid Tea Party and push for tax reform. What a novel idea. I for one am not wealthy but am seriously considering using this vehicle to minimize my taxes.

just found this article, when searching CRT, I know it is old, hopefully the info is still valid. What I'm stumped on is how to actually do this - create/open a CRT? Do you go to the charity and ask them, or work directly with a financial institution or insurance company, or ? I contacted a couple of charities and it almost seemed like there was no interest or they weren't familiar with this. Thus the reason I'm asking where to start.
Also, would you know if the income from the CRT to the beneficiary is taxable?

thanks,

You will need to speak with an attorney to set this up. Charities may not be familiar with these complex giving tools. Feel free to contact me at [email protected] or (855) 380 0070