A charitable remainder trust works best with a capable captain at the helm of a well-built boat.
By Bill Zook, Senior Advisor, Gift Planning
While it will often fall to a client’s lawyer, advisors working in many different professions are called upon from time to time to identify an appropriate fiduciary to help implement the client’s financial or estate plan. Of the three primary types – personal representative, holder of a power of attorney, or trustee of any of the many types of trusts – Seattle Foundation is part of the landscape in selected instances.
Although the Foundation plays no role in administering estates, nor does it ever serve as an agent for any principal, it will accept appointment as trustee of certain charitable trusts. Specifically, it serves in that capacity in connection with both charitable lead trusts and, far more frequently, charitable remainder trusts (CRTs) from which it will one day benefit. Moreover, because Seattle Foundation is also a remainder beneficiary of other CRTs, it has a lot of experience with what makes for a well-operated trust, no matter who the trustee is.
Even the most capable trustee will be at a disadvantage if a client has unrealistic expectations of the trust or if the trust’s terms are questionable. Any professional advisor counseling a client thinking of establishing a CRT needs to be clear regarding what can likely be accomplished through such a trust and what cannot.
Accordingly, any cash flow or remainder value projections should reflect stormy scenarios as well as sunny ones. Similarly, the range of potential funding assets should be carefully considered, and the possibility that illiquid assets will take a long time to sell and sell for less than expected must be confronted directly. The taxable nature of trust payments also must be recognized, with an emphasis on the worst-in, first-out regime of four tiers. This means ensuring the client understands not only the sub-tiers within the ordinary income and capital gain tiers, but also the difficulty of reaching the tax-exempt and tax-free tiers without pursuing grossly contorted investment strategies.
If planning discussions are conducted conscientiously, this will increase the odds of a trust having suitable terms with respect to matters such as duration, payout rate, and the timing of each year’s installment(s), all of which affect the size of the charitable deduction. In addition, sound decisions need to be made as to the trust’s basic structure. Even though most CRTs pay a unitrust amount, there remain occasional situations in which an annuity amount is preferable. Moreover, when a unitrust is settled upon, choosing the right “flavor” will likewise be important.
Note: Over the decades, Seattle Foundation’s staff and consultants have been called upon to help donors and their advisors identify and address applicable issues. This involvement, which ultimately does not supplant an advisor’s responsibility for guiding a client, remains available without charge to donors and any of their advisors, regardless of who ends up being the trustee, so long as there is a serious interest in the option to name the Foundation as a remainder beneficiary.
As with any trust, a CRT trustee’s primary responsibility will be to administer the arrangement faithfully and competently pursuant to whatever is spelled out in the trust instrument. With a CRT, however, the trustee will also need to focus on specific duties.
First, to invest trust assets properly, the trustee must not only weigh factors such as investment horizon, preservation (and, ideally, growth) of principal, risk-return trade-offs, and cash flow demands, but also understand the four-tier system of payment taxation. In addition, maintaining the tax-exempt status of the trust is of critical importance. This translates into taking steps as simple yet critical as making payments when called for, to as potentially intricate as complying with various private foundation rules pertaining to concerns such as conflicts of interest. Then there are tax and accounting tasks that should be handled in a first-class manner, whether directly by the trustee or by a knowledgeable party engaged by the trustee.
A professional fiduciary such as a bank will typically be a good choice. Nevertheless, it is wise to get a good sense of the potential trustee’s track record with CRTs. The main drawbacks can be high minimum amounts and relatively high fees, although the latter are usually justifiable when high quality service is provided.
On the one hand, lower costs are typically associated with having an individual – whether the client (in the case of an inter vivos CRT) or someone else in whom the client has confidence – be named as the trustee. Then again, it is the rare person who possesses all the abilities called for, making it essential that the trustee recognize the limits of their own abilities and then exercise diligence in securing the necessary expertise.
A third option often exists when a large, sophisticated charity is irrevocably designated as a remainder beneficiary. Such an organization commonly partners with a financial institution in serving either as co-trustees or in naming the entity as an agent to fulfill specified duties.
Seattle Foundation has long made this option available, and currently it collaborates with BNY Mellon in managing dozens of CRTs. Advantages include:
To learn more about various charitable vehicles with Seattle Foundation or to discuss how Seattle Foundation might be of assistance, please contact Bill Zook, Senior Advisor, Gift Planning, at (206) 388-1722.