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CRT & Family Foundations Question: The clients have highly appreciated publicly traded stock, and are considering using a charitable remainder trust (CRT) as one of their planning strategies. The idea is to donate the stock to the CRT, sell the stock within the CRT, and then generate a retirement income for their joint lives from the CRT. Then, when the second spouse dies, they would like the money in the CRT to go to some sort of family foundation which their children could manage, and from which their children could pull salary. 1. If my clients set up the CRT this year, are they supposed to pull income out of the trust this year in order for them to claim the charitable deduction on this year's income tax return? 2. Also, if no money is needed from the CRT for 8-12 years, wouldn't a NIMCRUT be a good idea? If we use a NIMCRUT, what are the best types of investment vehicles (annuities?) to turn the income on and off? Also, are there restrictions on the types of these investments? 3. If the money from the CRT ultimately goes to a family foundation, doesn't that affect the amount of charitable deduction taken for income tax purposes? If a family foundation is used, how much money can the children take from the foundation as compensation for running it? Is 2.5% reasonable? Also, aren't legal and accounting expenses high for family foundations? Is there a suggested minimum amount that should fund a family foundation in order for the legal and accounting fees to be absorbed reasonably? Reply #1: 2. Generally, NIMCRUTs would be suitable for the client that wishes to minimize current income. To the extent the trust assets do not generate current income, no current distributions are required. Annuities are often touted for their unique ability to enable the trustee to turn on and off income. However, the ability to do this is dependent on whether the growth in a deferred annuity contract constitutes distributable net income under state law or not. Advisors should review their jurisdiction's version of the Uniform Principle and Income Act or its equivalent to determine whether an annuity makes sense in this context. There may also be contract features (surrender charges, annuitization age, etc.) that make one company's contract better suited for this than another's. 3. Yes. Private foundations generate a lesser current income tax deduction. For example, the deduction for gifts of long-term capital gain property to most private foundations is often limited to 20 per cent of the taxpayer's adjusted gross income (versus 30 percent for "public" charities). Certainly the children may be paid reasonable compensation for their services rendered. What constitutes reasonable is based on the facts and circumstances of the case. Generally one would look to the types of services being provided and compare with jobs providing similar services. Finally, there is no question that private foundations require the advice and counsel of competent professionals, which can be costly. This should be considered before setting one up. Doug Lawson Reply # 2: The legal and accounting costs for a private foundation can depend on the choice of legal entity: trust vs. corporation. While a corporate structure has its advantages, a trust structure can be less costly to administer. The cost of set up varies between $3000 and $15,000 (donor paid) and the cost of administration runs between ˝ and 2 % of the foundation’s assets. The costs include director fees, accounting fees, custody fees, investment management fees, and any fees paid to consultants (per a Renaissance study in 1995). All private foundations are subject to a yearly excise tax of 2% of their net investment income unless the foundation can qualify as a supporting organization. Supporting Organizations have a specific public charity or charities in mind when it is organized and pay substantially all it income out to the charity annually. Supporting Organizations are fairly rare because the regulations governing them are so complex. Tere D'Amato, CLU, ChFC
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