Malpractice
Coverage - III
Don't
Leave Home Without It
(third in a
series on design and implementation issues)
To someone with only a
hammer, everything is a nail.
To
someone with only a screwdriver, everything is a screw.
I periodically receive requests for assistance from brokers
looking to propose the next “best idea” to their clients, and after they’ve
done a little research on a CRT, they try to approach it like selling a tax
shelter. I usually suggest a more
balanced approach with the tax benefits being more like icing on the cake
instead of the primary reason for the creation of a complicated legal structure
with a lot of ongoing maintenance.
Sometimes the proposed trusts are high payout, funded with
inappropriate assets or are poorly designed with little philanthropy involved. Too often the advisor’s reply is that the
charity didn’t really expect something and anything the charity receives is
better than nothing. It’s too bad that
a limited attitude like that isn’t uncommon amongst product pushing planners
using a charitable trust as a marketing tool; it circumvents the real reason a
charitable trust should be proposed, namely, that clients have some
philanthropic interest. Let’s face it, unless a client has a pressing need to
sell all of an appreciated asset right away, sometimes it makes more sense to
just sell a little of it every year and pay capital gains tax on the
profit. For many clients it wouldn’t be
much more advantageous to run the appreciated asset through a CRT and take
their taxable distributions under the four-tier accounting structure
anyway.
So what’s the real reason some brokers suggest a charitable
trust when simpler solutions might work better? Sometimes it’s misplaced enthusiasm for something new, but poorly
understood, sometimes it’s seen as a magic bullet that only offers a
“win-win-win scenario” and sometimes it’s simple greed.
Product
Sales and Money Under Management
I taught an estate planning session for a large group of
insurance producers at a well-regarded C.E. program and had an insurance agent
tell me he was going to set up a CRAT and buy a “life-only” Single Premium
Immediate Annuity to "guarantee" the income stream for the income
beneficiary who was his client.
Unfortunately, the charity’s remainder interest would be left with nothing
when the trust term ended because a single life annuity terminates at the death
of the beneficiary. He suggested that
it was more important to protect the income stream for his client and I replied
that a CRT was a “split-interest” gift and there had to be something to make it
truly a charitable tool, so he proposed selling the CRAT a life insurance
policy to make sure the charity eventually received something. Both of his answers involved the sale of
commissionable products, and I reminded him that a CRAT did not allow for
ongoing contributions to pay insurance premiums. Despite his determination to sell somebody something, I suggested
that some states might view the trust as improperly diversified or even improperly
funded. A more conservative approach
with some decent equity funds would have been more appropriate, but he said he
didn't have a securities license, so the insurance products were his
solution.
I see many improperly constructed charitable trusts when
product driven sales personnel suggest a CRT just as a way to take assets under
management or sell wealth replacement life insurance. Not that either action is illegal, immoral or unethical, it is
just short sighted and likely to result in unhappy clients who find themselves
stuck with an irrevocable trust that doesn’t meet their needs. It’s more important to develop a holistic
approach with a more values driven orientation if advisors hope to cement
relationships with their most valuable clients.
Some commentators might say litigation is a shot across the
bow to encourage planners to return to reality. Reviewing a recent lawsuit (Martin v. Ohio State University
Foundation) and the factors that led up to a series of dangerous decisions
might save some future malpractice or E&O expense. It’s never a bad idea to take an objective
view of the planning options and make sure that the clients have complete
disclosure of the advantages and disadvantages of the planning tools being
proposed. Well-briefed clients tend to
be appreciative of the extra effort and it’s an important factor in client
satisfaction surveys. Take the extra
time and make sure it’s done right.
Henry & Associates
22
Hyde Park Place, Springfield, IL
62703-5314
217.529.1958 --
217.529.1959 telefax
800.879.2098
toll-free -- VWHenry@AOL.com
© 2001
http://gift-estate.com/crt.html
