Let’s face it. Charitable trust planning has become increasingly complex. In 1997 alone, FUP trusts resurfaced–this time with the IRS leading the charge! Capital gain to income NIMCRUTS gained wider popularity last year because of their “total investment return” capability. And, the new capital gain rate tiers have made PGOs even more acutely aware of the need to pay close attention to the type(s) of investments that are selected in CRT arrangements.
Additionally, wealth continues to grow rapidly in our country. The Wall Street Journal recently noted that the Dow Industrials have grown by an average of 31 percent each year since 1995. As of this writing, the “boom” continues well into 199B. As a result, there are an increasing number of individuals/families who have engaged highly sophisticated professional planners to help them preserve their assets while minimizing taxes. In many cases, charitable trusts are being woven into an overall estate plan that is complete with limited partnerships, Alaska trusts, IUTs and so forth.
Today, when the phone rings in our foundation office, it’s more likely Jack B. Rich’s accountant wondering about the minimum threshold amount we require in order to serve as trustee and/or administration than it is sweet old Wilma Jones wanting to visit about her nephew, the farm, and how a life income plan works.
So, in addition to having a good blend of technical and human relation skills, successful PGOs in the 1990s must also possess good business acumen. Our pencils and our minds must be sharp; we must be able to think critically not just about the size, but also the nature, of the next potential CRT that comes our way.
Need to Consider Changes
In contrast to the increasingly complicated real world of charitable trust planning, many organizations maintain relatively simplistic planned giving guidelines. They rely on a policy which suggests minimum ages and funding amounts, maximum payout rates, or a certain percentage of the remainder value, to determine whether a proposed CRT arrangement is “good” or “bad.”
Given the ever-increasing complexity of CRT planning, this kind of policy (and thinking) may too narrowly define the parameters within which a charitable organization will consider being involved in a CRT arrangement. For instance, wouldn’t we gladly accept the role of trustee in a CRT which is being funded with $3 million by a high-tech veep–even if it violates our 50-year minimum age rule? As long as it passes the 10 percent remainder value test, there is probably ample reason to consider doing so.
Or, how about the 85-year-old gentleman who wants to create a relatively small ($150,000) high-paying (12 percent) CRT funded with appreciated stock? Even though the payout rate violates our maximum payout rule, wouldn’t we willingly serve as trustee in this scenario too? How a PGO (and his/her supervisory committee) views CRT planning should rely less on a set of fairly narrow guidelines, and more on the trust’s projected real value to the charity.
Certainly each organization is positioned differently. Many organizations provide trustee services and/or trust administration without charge–others do not. Some charities pay much of the upfront costs associated with a CRT’s creation–most do not. So, projecting real value will be a slightly different exercise for every organization, but a worthwhile exercise nevertheless.
The following formula, while admittedly a bit complex, should provide a basis from which your organization can establish its own “measuring stick” in evaluating the viability of potential CRTs. The goal is to end up with a formula that, if consistently followed, will allow each potential CRT to be evaluated on similar and fair terms. (See footnotes section for an example on the computation for each step.)
Step One: Consider the Trust’s Likely Growth.1
Trust funding amount plus growth rate. That is, earnings (after money management expenses) minus payout rate = (insert after payment projected annual return). Compound return by the trust’s projected number of years (actuarial expectancy) to determine approximate future value of trust corpus.
Step Two: Consider the Upfront Costs.2
Determine upfront costs such as Level I audits, legal fees, etc. Then run an interest loss factor (a reasonable rate might be the average return your organization has garnered on its endowment fund) on the upfront money spent. Use the projected number of years (actuarial expectancy again) to determine future value of the upfront costs. Subtract the upfront costs from the trust corpus.
Step Three: Consider the Ongoing Costs.3
Determine ongoing costs such as administration, annual tax preparation, etc. Then run an interest loss factor (same percent as determined in step two above) for each year of the trust’s remaining actuarial expectancy. (NOTE: Assume ongoing costs will go up each year at least by the rate of inflation.) Subtract the ongoing costs from the trust’s corpus.
Step Four: Consider the Present Value.4
After up front and ongoing costs have been subtracted from the trust principal, run a net-present value projection (at least using the rate of inflation) on the principal to find, in today’s terms, what the real value of the trust is to your organization.
Each organization must decide how much present value should exist before it will accept the role of trustee and/or administrator. In determining present value, some organizations may decide to include ongoing costs that account for staff, space and marketing as well.
At the end of this exercise, some organizations will contend that any future projected benefit is a worthwhile reason for their organizations to be involved. Other organizations might be more comfortable with a minimum annual amount (present value of trust corpus divided by the number of years of trust’s expectancy) in order to accept the liability and/or responsibility of being trustee/administrator. And still others might consider a policy that advocates involvement with CRTs if the minimum annual base amount equals the amount necessary to be involved in a particular gift club. After all, the liability and ongoing work on behalf of a particular CRT ought to be worth something!
Organizations will be different in deter-mining what their “net take” should be in CRT arrangements. Whatever the case, a standard formula developed, and then consistently used, will allow organizations to have a policy that should survive the challenges of time and change that inevitably occur in the charitable planning business.
Ongoing Costs for $250,000 Trust
|Year||Tax Preparation & Administration||Trust Years Remaining||x||Interest Loss Factor||x||Cost in 2018|
NOTE: The following examples are based on a $250,000 initial funding amount for a standard 7 percent payout, 10 percent return unitrust with a 20-year trust term expectancy.
- $250,000 (funding amount) x 3 percent (10 percent average return rate – 7 percent payout rate) x 20 years (trust’s actuarial expectancy) = $451,528.
- $2,500 (costs for environmental audit, attorney review, etc.) x 9 percent (interest loss) x 20 years (trust’s actuarial expectancy) = $14,011. Subtract $14,011 (upfront costs) from $451,528 (trust’s corpus) = $437,517.
- Example: $900 for the first year (costs for annual administration, tax preparation, etc.) x 9 percent (interest loss) x trust’s remaining actuarial expectancy = $4,627 the first year. Subtract $57,243 (total ongoing costs) from $437,517 (remaining trust corpus) = $380,274. (See Table A)
- $380,274 (remaining trust corpus in 20 years) @ 3.5% inflation means $191,113 of real value in 1998 dollars.
Gene Christian is regional director of charitable estate and gift planning for six hospitals and one child center, which are all part of the Providence Health System in Oregon. He routinely conducts continuing education seminars for the professional community and speaks at various local and regional conferences on charitable planning strategies. He is the current chapter president for the Northwest Planned Giving Roundtable.
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