Conventional estate planning wisdom holds that a planner should neither tie up most of a family's wealth in a CRT nor use the tax exempt trust for clients without much of an estate tax liability. Generally, those principles are sound. However, in the following case, there are reasons to consider the §664 trust as a viable option that solves unique problems.

Annabelle Leighton, a 72-year-old widow, has been living on her social security payments and some modest cash rental income from her father's farm, inherited 23 years ago. Out of a somewhat misguided sense of obligation, she has allowed her tenant to continue renting her ground at a rate far below the fair market value because he used to farm it for her father. This hesitancy to replace him as her manager and tenant meant that the rental revenue from highly appreciated farmland was not enough to properly assure an adequate income for her and her daughter. While other farmers were interested in renting her ground, her loyalty to her tenant precluded her from negotiating a more generous payment, so she concluded that retirement and a sale would be the easiest way to get out of a bad business arrangement. Recently, she's had several realtors solicit her to sell the ground for the expansion of a nearby residential and commercial development, but there's a significant capital gains liability. To further complicate matters, Mrs. Leighton's only child, Laurie (53), is mildly retarded and living in a group home.

One of the options available for the charitably inclined Leightons is to create a 2 life charitable remainder trust (CRT) with Mrs. Leighton as trustee and income beneficiary, and Laurie as a successor income beneficiary. Normally, multi-generational or non-spousal income beneficiaries create gift and estate tax problems, so the following features were drafted into her custom CRT document.

Firstly, Mrs. Leighton is the income beneficiary and her daughter's income interest is revocable by will, only to commence after Mrs. Leighton passes away. This ensures Annabelle's retirement security and prevents the naming of Laurie, a nonspousal income beneficiary, from creating a current gift tax liability, since the gift of the income interest is still incomplete.

Secondly, by allowing Laurie to receive an income stream from the CRT, the likelihood of her being cut off from future resources is reduced and the danger of her losing the land or cash by fraud or mismanagement is eliminated.

Thirdly, the trust includes options for changes in charitable beneficiaries and the power to invade principal for current distributions to charity.

Mrs. Leighton appointed a corporate fiduciary to act as her successor trustee with three primary responsibilities:

1. The trustee will reduce the corpus in the trust to the maximum level covered by Mrs. Leighton's applicable exclusion amount so there is no estate tax liability when the income interest transfers to Laurie. By distributing just enough principal to the charitable beneficiaries, the trustee will effect a zero transfer tax. This action is very important because a CRT can not pay the tax obligations of the estate. Preplanning is important since the old unified credit of $600,000 in 1997 slowly increases to $1 million by 2006, and it would be difficult to forecast how much could be in the trust before the successor income interest transferred to Laurie creates an unnecessary tax. Because the estate tax-free income interest needs to be recalculated annually, the trust corpus might exceed $2 million before any reduction would be needed when Laurie's income stream commences.
2. The trustee will retain the right to change the charitable remainder interests. Initially, the group home, a 501(c)3 organization, was named as the primary beneficiary, with a few other nonprofit organizations receiving minor benefits. If the trustee feels that Laurie's well being has suffered and the general quality of care has declined, the trustee will be authorized to move Laurie from the home and name a series of other charities to receive the trust's largesse. Mrs. Leighton felt that this clause might encourage the group home to maintain a high quality operation and take a little extra interest in supervising her daughter's care.
3. The trustee was also charged with overseeing Laurie's income stream to ensure that her needs were properly met.

Normally, it's not a good idea to put most of the donor's resources in a charitable trust with the idea of protecting assets. However, in this case, with no other family members on the horizon and Laurie's special needs, the CRT can be made to provide both adequate income protection and some powerful planning options. Structuring the transfer properly means there is no tax and the family's strategic charitable interests are enhanced.

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