Case Studies and Articles

Getting the New Development Officer Off to a Fast Start – Vaughn Henry & Associates

One of the things I’ve learned about helping new development officers is that the quicker they can find partners amongst for-profit advisors, the faster they can get their programs off the ground.  Why is that?  A Prince survey of wealthy donors published in 1997 stated that for-profit advisors motivated 78.3% of planned gifts.  Since many development officers come up through the ranks as educators or social workers, few have a lot of real world financial experience with significant wealth, so some donors may not feel comfortable divulging information of a confidential nature to employees of charities.  On the other hand, the gatekeepers to private wealth are the professional advisors, so it makes sense to create planning partnerships to further your program’s success. 

Once settled into the job, a new development officer should gather other professional advisors around and create a synergistic relationship.  Where to start?  Find a mentor, even a virtual one, and bounce ideas around.  You’ll never learn if you don’t ask questions because this is a complicated business.  Unfortunately, most development people are thrown into the deep end of the pool without any training and they are soon overwhelmed.  With all of the technical material to learn, information on the charity’s mission and history to absorb, and donor cultivation to keep current, there’s more than enough to stay busy, so delegate the learning to a support group.  Start a planned giving committee and make use of community resources, encourage a bank or financial services firm to co-sponsor an event, find area speakers who are respected and knowledgeable to reinforce frequent presentations.  Offer workshops and ongoing training for advisors, establish relationships and you’ll encourage more cooperation but accept the fact that donors are inclined to support more than one charity.  The problem with some advisors (I’m being blunt here) is that they usually have to see why it’s helpful to them and their clients, and not just an altruistic, tax deductible strategy that many development officers use to motivate gifts from donors.  By presenting objective solutions to donors’ financial and estate planning problems, you can educate advisors how planned giving fits into the process.  Client donors seek advice from many sources, often listening to the last person who talked to them.  If every advisor they refer to validates the planning process and gift planning tools, they will be more comfortable doing something unnatural, i.e., giving their stuff away while they’re still using it. 

Other tools to use?  Make use of the Internet discussion groups, which are especially important in small development shops with no one to bounce ideas around.  Join your local planned giving council and get involved.  Attend workshops and seminars, get as many of your pre-approved committee members as you can to come to your organization and do programs for both the staff and donors, learn wherever you can.

As an example of the collegiality found on the Internet, I asked for some suggestions for new development officers and was offered several excellent ideas, some of which follow:

·      “No one makes a gift until asked to do so.” — Sam Highsmith, JD

·      “Do your giving while you’re living so you’re knowing where it’s going.” — Hal Moorman

·      “Give appreciated capital assets while you’re alive.  Leave IRD assets at death.” — Douglas Wise

·      “if you are benefiting another person who is not your spouse with your charitable gift, it will cost you either unified credit or gift tax” — Stuart Sullivan

·      “if you are wealthy enough, your are going to be a philanthropist when you die, you can choose the charities or the government will choose them for you”  — Stuart Sullivan

·      “Many individuals do not know what the term “charitably inclined” or “nonprofit” means.  However, they are apt to respond positively when asked, “have any organizations meant a lot to you or your family, such as your church or university or Girl Scouts?”  — Kate Busch

·      “Remember, new development person, it costs money to give money away.  Treat a prospect with respect because a gift is an expense from her/his perspective.” — Dick Zinzer

·       “Using a private foundation as the donee charity can permit a family to control the manner in which the family’s wealth is dispensed for social causes, be a focal point for future family interaction, give children, grandchildren, and descendants a clear sense of social and moral duty and purpose, not to mention providing substantial tax deductions.” — Wes Yang, Esq.

·      If you have to make a choice, develop your people skills first and the technical knowledge second.  You meet the people, you can hire the technicians. — Mike Howell

·      “Generally, you should make a charitable bequest out of an IRA or other retirement plan rather than from your will or revocable trust.” — Scott Blakesley, Esq.

Copyright 1999 – Vaughn W. Henry

Case Studies and Articles

Flexibility in a CRT

Flexibility in a CRT

Flexibility and Options

The Power of the NIMCRUT

Vaughn W. Henry

 For those considering an IRC § 664 – Charitable Remainder Trust as an estate or retirement planning tool, take a look at the Net Income with Make-up provisions of a CRT (NIMCRUT). While the standard Charitable Remainder Uni-Trust (CRUT) requires 5% as a minimum annual distribution, based on annually revalued assets, it is rigid in its distribution rules. Add a net income feature and you receive the lesser of all the trust income or the original pay-out percentage, whichever is less. If you make income, you have to take it, with no ability to defer it until later. However, if the trust makes no income, the beneficiary receives nothing. Thus, income potential is forever lost in poor performing years. The problem with trusts that may effectively last for several lifetimes is that IRS prototype (pre-approved and standardized) trust documents do not allow for much flexibility in managing complicated distributions. Instead, use a customized NIMCRUT, and it becomes a “spigot trust”. Called spigot, like a water valve, the special trustee directs the trust administrator to turn the income streams on and off as needed by the beneficiary. The traditional NIMCRUT funding approach uses growth mutual funds to prevent unwanted income from spilling out of the trust. When income is needed, the assets inside the trust are generally repositioned into income funds capable of generating the required pay-out. Unfortunately, this does not effectively control ordinary income that forces unwanted distributions out of the trust. This happens when net income is produced from the occasional capital gains or dividends generated by any investment in the CRT. While funds producing 2% ordinary income and 8% growth are not shabby, it becomes more efficient when all 10% of the gain can be deferred and retained inside the trust to compound tax-deferred for future use. The down side occurs when the equity market has a bad year and there is no “distributable net income” (DNI) produced, so the beneficiary cannot access any funds during that year. During the accumulation phase, this is not a problem; but, during the distribution phase it creates a serious management problem when using mutual funds. Briefly, a solution may lie in a proper trust drafting and a series of deferred annuity contracts that have “earned income”, but as long as an independent trustee refuses to accept it, the money can remain undistributed. Unfortunately, few annuity providers offer the administrative support to work within these specially constructed NIMCRUTs. Those that do, have learned how to flex according to the needs of their clients. When the trustee holds several annuity contracts and specifies that one be completely invested in a fixed portfolio, the income beneficiary can be assured that at least some income will always be available for distribution. This is much different from the mutual fund approach, over which the trustee has no discretionary control in distribution. Properly structured, a NIMCRUT can provide a vehicle for managing tax-deferred growth. Regarded as the eighth wonder of the world, tax-deferred compounding investments can fund both college educations and retirement needs from the same CRT account. Best of all, this can be done without the usual age restrictions and penalties on pre 591/2 distributions from tax sheltered savings. For example, the trustee may direct the “spigot” be opened to pay for children’s tuition and then closed until income is needed for retirement, when it is again reopened. By aggregating the undistributed income in a make-up account, the accumulated deficiencies may be made up by paying out excess funds in years that produced extra income. Generally, NIMCRUTs work best for younger trust beneficiaries with hard to value assets that may be difficult to immediately market (e.g. farm land, development property, etc.) and reposition within the trust. Given the capacity to accumulate a little cushion when income is not needed, the NIMCRUT is ideal as a retirement supplement. This ability to store income and grow it efficiently provides for future substantial distributions from the make-up account.

Charitable trusts have the capacity to prevent death from interfering with passing down a value system. Besides obvious philanthropic interests, why use a charitable trust? The CRT allows for:

  • Estate planning options
  • Increased cash flow from more diversified assets
  • Improved asset management and retirement planning
  • Tax-free conversion of individual and corporate appreciated assets
  • Redirected “social capital” (those assets targeted for tax liquidation) by having the family control the ultimate use, not the government
  • Income tax deductions for split-interest gifts

Who else would benefit from such a vehicle? Anyone with or apt to have a fully funded qualified plan with excessive accumulations. With no IRC §415 limitations, the tax deferred accumulations within a “spigot trust” offer the trust beneficiary the similar performance of another retirement plan without the burden of meeting anti-discrimination regulations for employees. After evaluating the numbers on many pensions where years of savings are ultimately lost to estate tax, income tax and excise tax, look at the CRT for viable planning alternatives.

ãVaughn W. Henry,Henry & Associates. 1996, 1998

E-mail [email protected]

Springfield, Illinois 62703-5314

(217)529-1958 or toll-free 1(800)879-2098




Statistical lifetime trust income for both donors = $4,478,161

Calculated charitable gift of remainder interest = $5,070,433

Current income tax deduction = $250,920 for the $1 million transfer

Example of one scenario in a 5% NIMCRUT earning 10% and deferring payout until year 6, withdrawing assets from the make-up account and then drawing an increasing stream of income for life. The donors (age 56/54)) contribute $1 million in highly appreciated stocks (although cash works too), avoiding the capital gains tax on the appreciation. They receive current tax deductions of $250,920 available over six years and then an income stream for their joint lives, statistically for 35 years. The donors designed the deferred income to be available to buy a vacation home as they enter retirement. By creating a wealth replacement trust for their heirs, they effectively remove a $1 million asset from their taxable estate, while transferring that value to their children tax-free. This trust is primarily designed for younger donors who want to maintain control of their income stream. Hard to value assets like real estate can also work well inside of this trust. There is a new TAM from the IRS on this procedure that addresses the self-dealing concerns by some legal commentators. Properly done, the NIMCRUT works as designed.

Statistical lifetime trust income for both donors = $1,750,000

Calculated charitable gift of remainder interest = $13,740,680

Current income tax deduction = $408,986 for the $1 million transfer

The second scenario is a 5% Charitable Remainder Annuity Trusts (CRAT) earning 10% and paying out a 5% annuity, or $50,000/year for the donors’ joint life expectancies (35 years). The donors (age 56/54)) contribute $1 million in highly appreciated stocks (although cash works too), avoiding the capital gains tax on the appreciation. They receive current tax deductions of $408,986 that reflects the probability of a higher remainder interest being left to the charity. By creating a wealth replacement trust for their heirs, they effectively remove a $1 million asset from their taxable estate, while transferring that value to their children tax-free. This tool is best used for much older donors unconcerned about inflation who want to leave a larger gift to charity. Funded with stocks, cash or other liquid assets, it provides for a straightforward and uncomplicated income stream.

Statistical lifetime trust income for both donors = $4,309,931

Calculated charitable gift of remainder interest = $4,920,774

Current income tax deduction = $250,920 for the $1 million transfer

Example of a third scenario in a 5% Standard Charitable Remainder Uni-Trust (CRUT) earning 10% and paying out 5% annually producing an increasing stream of income for life. The donors (age 56/54)) contribute $1 million in highly appreciated stocks (although cash works too), avoiding the capital gains tax on the appreciation. They receive current tax deductions of $250,920 available over six years and then an income stream for their joint lives. By creating a wealth replacement trust for their heirs, they effectively remove a $1 million asset from their taxable estate, while transferring that value to their children tax-free. This trust is designed for donors concerned about inflation who still wish to leave a significant gift to charity. The standard CRUT does not offer any choice in deferring income generated from the trust, but may offer more tax efficient distributions now that the Taxpayer Relief Act of 1997 has changed capital gains treatment.

Designing charitable trusts to meet the different needs of donor and charity offers great flexibility. Besides manipulating the payout from the CRT, and choosing the type of trust and character of assets held by the trust, the trustee often has the ability to change the remainderman to reflect concerns about use of the family’s social capital.


Maybe it’s Me – More on Charitable Split Dollar Plans – brought to you by Vaughn W. Henry & Associates

Maybe it’s Me – More on Charitable Split Dollar Plans – brought to you by Vaughn W. Henry & Associates

Maybe it’s Me

by Stephan R. Leimberg, Esq.

My father always said (when he was sure he was right and the other person was wrong), “Maybe it’s me. Maybe I just don’t get it”.

Well, maybe it’s me.

But when people ask my opinion of Charitable Reverse Split Dollar, I have a hard time understanding why it’s so difficult for them to see what I see.

So let’s forget all the Code sections and legal jargon. Forget the technical terms like “quid pro quo”, “partial interest rule”, “step transaction” doctrine”, “private inurement”, and “private benefit”. Let’s forget – for a moment – the Uniform Management of Institutional Funds Act.

Let’s just take an honest – and common sense – look at what is really happening:

Picture in your mind that you are the president of a charity. The Attorney General of your state and the head of the local IRS office pay you a visit. During that brief chat, you happen to mention that last year, your charity was given a check for $100,000 by donor X.

Your two visitors ask: “Did you send donor X a letter thanking her for that gift?”.

You reply: “Yes, of course I did”.

They then ask: “In your letter, did you state that she received nothing from your charity in return for that gift”?

You reply: “Yes, I stated that the donor, X, received nothing of value in return for her $100,000 check.”

They ask: “No quid pro quo whatsoever?”

You answer: “Nothing! I stated in the letter that she got nothing in return for her charitable contribution.”

A few minutes later your visitors ask: “How did your charity use the $100,000 outright gift of cash? Was the money used to buy new wheelchairs? Did you purchase exercise equipment for the children? Did you buy new orthopedic braces? Just how was the $100,000 used?”

You reply: “We are putting the money toward an insurance policy on the life of the donor of the $100,000 gift”.

Your visitors ask: “What portion of the $100,000 a year are you putting toward that policy?”

You reply: “Pretty much all of it.”

Your visitors remark: “Must be a very large policy,” “Was donor X a frequent contributor to your charity in prior years?”

You reply: “No. This was her first gift. But she plans to make a gift of about the same amount year after year for a number of future years.

Your visitors ask: “Are you under a legal obligation to use each year’s $100,000 gift to make the annual premium payments?”

You (honestly) reply: “No. Our charity is under no legal obligation to turn around and use that money each year to pay premiums. We could use the money to purchase wheelchairs.”

Your visitors ask: “But you’re not buying wheelchairs or exercise equipment or braces?”

You reply: “Well, no. We’re putting the money into this insurance policy”.

Your visitors ask: “Can we see the schedule of the build-up of cash values from the policy which your charity owns on X’s life?”

You reply: “Oh, We don’t own the cash values. We only have the right to some of the death benefit – if the insured dies while the policy is still in force”.

Your visitors ask: “So who owns the policy’s cash values?”

You reply: “Our understanding is that the cash values are owned by a trust on behalf of the children and grandchildren of the donor – insured. We’re just splitting the death benefit with that trust- but the trust actually purchased the policy. It owns the contract and it gets all the cash values.

Your visitors then ask: “So you are really just purchasing term insurance with the money you are paying toward the premiums?”

You reply: “Yes. We are essentially getting the equivalent of one year term insurance coverage every year. But if Ms. X dies, we’d get a lot of money”

Your visitors ask: “Are you are paying more, less, or the same as a competitive one year term policy you could have purchased on your own?”

You reply: “We never really checked.”

But when you do check – you find you could have purchased the term coverage on X’s life for significantly less than the money – the portion of the $100,000 a year your charity is actually paying toward the premium.

Your visitors ask: “What’s happening with the difference between what you could and should be paying for term insurance (assuming your charity had an insurable interest and the outlay was an appropriate expenditure of the charity’s money)? In other words, how large will the cash values – owned by the trust your client created for her children and grandchildren – grow to in Y years?

You reply: “It’s not really our business. The cash values don’t belong to our charity. But in Y years, the cash values will grow to about $6,000,000.”

Your visitors (particularly the state’s Attorney General) ask: “You said that your charity was receiving a check from Ms. X for $100,000 a year – no strings attached. Assuming a justifiable reason for insuring Ms. X’s life and assuming reasonable premiums for the type of one year term insurance your charity is receiving, what happened to the rest of your charity’s money? Why is the cash value growing in the hands of your contributor’s trust – for her children – rather than being invested or used for the crippled children and adults your charity is supposed to be caring for?

Come up with a good answer to any of these questions? I couldn’t.

Now picture yourself as the donor. Every year you file your tax return and claim a contribution to charity of $100,000. The charity has sent you a letter saying that you received no “quid pro quo” – you got (directly or indirectly) nothing in return for your contribution.

What do you say when the IRS auditor asks you: “Is that true? You received nothing back from the charity – directly or indirectly – in return for your $100,000 check?”

You say: “Oh, no” “Look, nothing up this sleeve. Nothing up that sleeve. I got nothing back from the charity in return for my $100,000 a year contribution.” “It even says in the promotional literature I consulted that “cash contributions are unconditional.”

What do you say when the IRS auditor asks you: “You know, don’t you, that the Code would not allow you any income tax deduction – if you personally purchased a policy on your life and split the premium dollars with the charity? And you know it’s a sin to tell a lie – that you gave a no-strings attached gift of $100,000 – and received nothing back in return – if in fact you got back something of great value?

You’d say, “Of course I do. I know no deduction is allowed for a contribution to charity of less than my entire interest.

What do you say when the IRS auditor asks: “Isn’t the charity’s split dollaring with the trust – and the circular path of the money from you to the charity – back through the split dollar policy to the trust you created – in reality a back door way for you to funnel money to your family’s trust? And doesn’t that constitute a gift of (a lot) less than a full interest in the $100,000?

Haven’t you – indirectly – retained a means of reacquiring (and then making a gift to your family of) a significant portion of every $100,000 check you write? Haven’t you really subverted the charity’s interest in the money or the policy which it could have purchased and totally owned with that $100,000?

What do you say when that same IRS auditor asks: “Why and how did the trust you set up for your children and grandchildren – get richer every year – even though you claim for gift tax purposes that you made little or no contributions to that irrevocable trust?” “Can we see your gift tax returns?”

Please correct me if I’m wrong. But it appears to me that the president of the charity has engaged in a tacit conspiracy with the “donor” to defraud the IRS (no, make that every U.S. citizen) as well as the charity. He’s told the IRS (and implicitly the Attorney General of the State in which the charity is located) that it’s received a no-strings (or stings) attached donation in the net amount of $100,000. Yet, clearly, there’s a string and a sting. If there were none, there would be a lot more wheelchairs and exercise equipment – and less wealth in the hands of the insured’s children’s trust.

And it’s pretty clear to me that each year, Donor X is lying on her tax return – claiming a deduction for far more than the net value of what she’s really contributing to the charity. Money is merely circulating from the client to the charity to the client’s children’s trust via the guise of the charity split dollaring a life insurance policy.

And maybe it’s me – but shouldn’t Ms. X be filing gift (and perhaps generation-skipping) tax returns – for the real (albeit indirect) gifts she’s making to the irrevocable trust she set up for her children and grandchildren? After all, the money didn’t appear in the trust from thin air. And certainly it would be an act beyond – and in violation of – the charity’s charter to use money that should have used to purchase wheelchairs – to enrich Ms. X’s children and grandchildren. So if it wasn’t the charity’s money, how did the $6,000,000 get there?

The charity’s contribution toward the policy is not an amount equal to the insurer’s one year term costs. According to the promoter’s sales literature, the charity’s contribution will normally be P.S. 58 term rates – which we all know is substantially higher (maybe five or six times) than the real cost of the coverage the charity is getting. And who gets the benefit of that annual overcharge the charity is paying? And if the charity lays out a “prepayment”, will it be paid a reasonable rate of return for the use of its money – or does that too magically find its way to the donor’s children’s trust?

We’re not talking about aggressive planning here, gang.

In my opinion , it’s likely the IRS would view this as nothing less than (“Read my lips”) T A X F R A U D. This is exactly the type of tactic that brought about the stiff charitable rules in THE TAX REFORM ACT OF 1969: Congress was fed up with charitable contribution deductions that didn’t truly reflect the value of the ultimate benefit flowing to charity.

Tell me if I’m wrong:

The donor and the charity know from the get-go that next year’s donation from Ms. X will never occur – if the charity didn’t “split” the death benefit dollars (and shift all of the policy’s cash values and the earnings the charity should have enjoyed on any “unearned premium account” to the irrevocable trust the insured donor set up for her children and grandchildren).

Ms. X, the donor, never intended that the charity could keep – and use for its charitable purposes – anywhere near the entire amount she claimed as a “no-strings-attached “I get nothing from it” $100,000 donation.

Ms. X, the donor, knew from the promotional literature that the whole scheme was a ploy to get a largely undeserved income tax deduction and shift significant wealth to her children and grandchildren’s trust at what was touted to be no gift or generation-skipping tax cost.

And if that’s what the donor and president of the charity are, what’s that make the promoters of this shell game?

Yes, I know there are infinite variations on this theme and each promises that its version is “different from all the others” and “our plan rests on solid legal ground”. I also know that some of these promoters are very sharp characters who throw so much paper and so many code sections at you – and tell you how much you can make doing it – and how much others are already making – that you want to believe it will work. (Especially if you’ve paid them a lot of money for the idea).

But take a really honest look at the quality of the cloth garbing the emperor:. The bottom line of every one of these schemes I’ve seen (and I admit even I haven’t seen it all) is the old “something for nothing” trick.

“Everyone – the agent – the charity – the insured – the children – you all get a free lunch – and the IRS will buy and pay for it”.

Well guys and gals – it ain’t gonna work. The IRS ain’t gonna buy it. And it ain’t worth your home.

Worse yet, when this scheme hits the Wall Street Journal, every split-dollar arrangement – even the very conservative and legitimate arrangements by very honest and ethical agents and attorneys – will become suspect.

Or maybe it’s me? Clearly, the concept is no secret. So why are its promoters so reticent to obtain a private ruling with respect to each of the issues I have raised? Clearly, a PLR is the least assurance competent counsel would insist upon. (And I’ll be happy to eat crow – medium rare – if a donor can obtain such a ruling).

P.S. If you are promoting this time bomb, when the IRS and the Attorney General of your state starts asking you these questions, call one of the attorneys who has issued a “favorable opinion letter” on this. I’m sure he’ll be willing to defend you – right down to your very last dollar!

P. S. P. S. The Executive Committee of the National Committee on Planned Giving (NCPG) has reviewed a number of these plans and has concluded, “Life Insurance “Quid Pro Quo” Poses Risks to Donors, Charities” and stated, “Notwithstanding the promoters’ claims to the contrary, NCPG strongly suggests that donors and charities not proceed with the kind of gift arrangement described above without first obtaining a private letter ruling from the IRS on the “quid pro quo” and partial interest issues.

Neither I nor they are alone in our position: See S. Horowitz, A. Scope, and S. Goldis, “The Myths of Charitable Split Dollar and Charitable Pension”, Journal of the American Society of CLU & ChFC, September 1995, Pg. 98 where the authors state: “This is not merely aggressive tax planning, it is egregious and borders on tax fraud…” Planners should carefully read two excellent and well reasoned discussions on the subject. The first is the objective, balanced, and scholarly “CHARITABLE REVERSE SPLIT-DOLLAR: BONANZA OR BOOBY TRAP?” by well known and highly respected Los Angeles attorney Douglas K. Freeman in the Journal of Gift Planing, 2nd quarter, 1998 (317 269 6274). Freeman further states in a recent ALI-ABA Course of Study on Charitable Giving Techniques given May 7th and 8th in San Francisco, “The reverse split-dollar technique is aggressive planning without substantial reliable authority”, “charitable reverse split-dollar is an attempt to stretch an aggressive program further”, and charities should never use their influence and reputation to promote a risky program that could influence donors to engage in an arrangement that could result in adverse economic or tax consequences to such donors”. Attorneys John J. Scrogin and Kara Flemming of Roswell, Georgia recently published articles in the May 1998, Pg. 2 and June issues of Financial Planning Magazine entitled, “A Gift With Strings Attached?” and “One Gift, Many Unhappy Returns” in which the authors state that charitable reverse split dollar plans may suffer the same fate that befell tax shelters in the 1980’s and that donors, charities, tax preparers, and plan promoters are all vulnerable if the IRS cracks down on charitable reverse split dollar plans.

Case Studies and Articles

Investment Choices Affect CRT Management – Part II – Henry & Associates

Investment Choices Affect CRT Management – Part II – Henry & Associates

Trail of Tiers II – More on Why Investment Choices Affect CRT Management

tiers For the trustee of a §664 CRT, the accounting for the “4 tier” treatment of distributions can be best described as WIFO (worst in – first out).   Consider the choices made for Susan Barry’s CRAT as an example.  She contributed $1 million of appreciated stock in a publicly traded consumer products manufacturer to her 5% CRAT and will receive $50,000 annually from the trust for the balance of her life.  Unfortunately, her financial advisor was more interested in selling product than solving problems and suggested that the trust reinvest her stock portfolio inside the CRT with tax-free municipal bonds.  His rationale was that the trust would be able to pay out her $50,000 distribution in tax-free income.  This is typical for some promoters who have a basic understanding of charitable trusts, but lack a lot of depth.

What actually happens if tax exempts are used as investments in a CRT funded with appreciated property is that all of the unrealized capital gains have to be paid before any tier 3 tax exempt income can pass to Susan.  Since she had only $100,000 basis in her $1 million of stock, this means $900,000 of realized capital gains must be paid out (and taxed at 20%) before any of the tax free income can be recognized.  Since the tax free municipal bonds only earn 5.25% the trust corpus can’t grow to benefit the charitable remainderman.  This becomes even more important in a unitrust (CRUT), as the income beneficiary would be shortchanged as well, since the CRT distributions couldn’t keep up with inflation.  In Susan’s CRAT, it would take 18 years of sub-par performance before she could benefit from the tax free income.  That’s poor trust management in the opinion of many trust administrators and a few state attorneys general who often oversee CRT performance to protect the charities’ interests.

Hypothetical Performance Over Ten Years5% CRAT5% CRAT5% CRAT5% CRUT
$1 million transfer ($100,000 basis) to CRT5% Income Portfolio5% Income 5% Growth10% Tax Efficient10% Tax Efficient
1st Year Income Payout$50,000$50,000$50,000$50,000
Tier #1 Income Distribution Taxed @ 40%$50,000$50,000$0$0
Tier #2 Income Distribution Taxed @ 20%$0$0$50,000$50,000
10th Year Income Payout$50,000$50,000$50,000$74,305
Remainder to Charity in 10th Year$1,000,000$1,796,871$1,796,871$1,552,970

Trustees have a duty to manage the trust’s assets for the benefit of both the remainder and income beneficiary.  It can be done without exposing the trust to excessive risk or volatility and with appropriate custom document provisions, tax efficient investing should be an integral part of any CRT trust management.

© 2000 — Vaughn W. Henry


FOR YOUR OWN CRT SCENARIO or try your own at PhilanthroCalc for the Web

Case Studies and Articles

Approximate Unitrust Deduction Factors

Approximate Unitrust Deduction Factors

Approximate Unitrust Deduction Factors

 “FAIL” based on Disqualification if deduction (remainder) is less than 10%

(based on 8% AFR, quarterly distributions at the following CRT payout levels)

 CRT 5% 5% 6% 6% 7% 7% 8% 8% 9% 9% 10% 10%
AGE 1 life 2 life 1 life 2 life 1 life 2 life 1 life 2 life 1 life 2 life 1 life 2 life
20 Fail Fail Fail Fail Fail Fail Fail Fail Fail Fail Fail Fail
25 .10 Fail Fail Fail Fail Fail Fail Fail Fail Fail Fail Fail
30 .13 Fail Fail Fail Fail Fail Fail Fail Fail Fail Fail Fail
35 .16 .10 .12 Fail Fail Fail Fail Fail Fail Fail Fail Fail
40 .20 .12 .15 Fail .12 Fail Fail Fail Fail Fail Fail Fail
45 .25 .16 .19 .11 .15 Fail .12 Fail .10 Fail Fail Fail
50 .30 .20 .24 .15 .20 .11 .17 Fail .14 Fail .12 Fail
55 .35 .25 .30 ..19 .25 .15 .21 .11 .18 Fail .16 Fail
60 .42 .30 .36 .24 .31 .19 .27 .16 .24 .13 .21 .10
65 .48 .37 .43 .30 .38 .25 .34 .21 .30 .18 .27 .15

Example below of aCRT §664Trust that would be disallowed under the new law:

Average age of husband and wife 34
Value of property transferred to a CRT $250,000
Payout rate for a standard unitrust 5%
AFR discount rate and earnings assumption 8%
Income tax charitable deduction (remainder) $24,610
Approximate joint life expectancy 50 years
Projected future charitable remainder $1,019,669

Under the new tax law, the couple above would be prevented from using a CRT because the income tax charitable deduction is just less than 10% of the fair market value of the property they transferred to their CRT. The charitable organization they would have named as beneficiary would also be denied the benefit of a future gift of over $1 million. While some argue that the 10% limit on present value of the charitable gift limit any future value to the charity, the real effects are going to be based on what the trust actually earns in the intervening years. It is unrealistic to assume that a young couple creating a CRT for 40 years or more would invest in financial products that would return only the applicable federal rate (AFR) of return instead of investing prudently for growth and income in a well-diversified investment portfolio. In this case, an 8% AFR is typically a bond rate and the S&P stock market returns would be in the 12% to 14% range; under these conditions, the charity would receive far more than the projected future value. For another example of this law’s effect, see the following case study.

This law was signed into legislation with the Taxpayer Relief Act of 1997 and is effective as of July 28, 1997. Existing testamentary trusts may also need to be modified to meet these requirements and additional contributions to existing trusts now must also meet the 10% remainder rules.

Henry & Associates

IRS Information, Regulations and Commentary on Charitable Legal Issues

Excess Accumulations in a Qualified Plan

Excess Accumulations in a Qualified Plan

Pension Traps for the Well Heeled

Excess Accumulations in a Qualified Plan — Why Some Participants May Want to Opt Out

It’s been said that the rich are not like other people. In fact, they have a whole set of problems that many of us cannot fully appreciate. Tax simplification and reduction may be popular political goals, but historically, Congress has nibbled away at the wealthy and their right to control personal wealth. A good example of this double standard is the excise tax trap in which many of the prosperous find themselves at retirement. Too much of a good thing obviously had to be penalized somehow.

While Congress dreams up new ways to wring more dollars out of the well to-do, the IRS has special regulations available right now to make life for wealthy savers more taxing. Conventional wisdom holds that the rich already have too many special tax breaks. In reality, for the well heeled, previous changes in laws have completely destroyed many of the same shelters and techniques that still benefit poor and middle class taxpayers. Income tax deductions are consistently eliminated, and net tax rates moved up without much opportunity to squawk from taxpayers. It is these gradual changes that have had such a big impact on the bottom line for many people looking to minimize tax hits on their assets. Even though published tax rates are lower now than in earlier years, without their old deductions, the taxes paid are higher and spendable income for many is actually much less. When politicians talk about tax relief, they cut in one area and increase in others.

The recently passed Taxpayer Relief Act of 1997 has eliminated the 15% excise tax on distributions during life as well as in estates. However, normal income and estate tax liabilities were kept in place. Since few estate tax breaks were passed in this legislation providing relief for professionals with significant estates, keeping a close eye on uncontrolled appreciation remains important. With the loss of §664 Trusts as a tool to pass down retirement plan assets for young beneficiaries, extra care needs to be taken with plans for some families with wealth.

As an example of the incremental hike in tax rates, the pension tax laws are a classic example of ways the government creatively generates new revenues. Pension savings were fully exempt from estate taxes as late as in 1981. Over the next five years, those qualified retirement savings plans (QRP) were gradually exposed to estate taxes and by 1986 were completely subject to tax liabilities, now at 55% for many estates. All of these backdoor tax increases occurred while big income tax cuts were simultaneously passed and promoted for general public consumption.

Once promoted as an ideal way to safeguard the future, qualified retirement plans may not work as originally intended for the top 5 – 10 percent of plan participants. Highly compensated pension participants, urged by their advisors to defer salary into qualified plans, may have put themselves into a trap with few options to control those funds. Savings, they were told, could be withdrawn as needed and theoretically used in a lower tax bracket. It was also assumed that flexible use in retirement would allow the retiree discretion in how those funds were exposed to tax. Today, it turns out that most wealthy retirees still pay taxes at the highest marginal income tax rates. Since 77 per cent of the nation’s wealth is held by those over 50 years of age, tax rates have stayed high to reflect that reality. Other planning assumptions about unused retirement savings being available to create an estate for heirs have also been proven wrong. The oft-heard advice to defer more income into retirement plans may be exactly the wrong thing to do today for many affluent savers. Not that saving in a tax-deferred environment is bad, it just may need to be repositioned for more efficiency.

When is this threshold for new taxes going to be an issue? The biggest problem exists if there is any potential for estate taxes and there are already significant assets in a qualified plan. Instead of the family receiving those unused retirement plan funds, about 75% will pass to the IRS upon the taxpayer’s death (income in respect of a decedent or IRD). Capital punishment in every sense of the word, estate and income taxes effectively confiscate almost all of the sheltered savings. These exposed funds include money in pensions, profit sharing and 401(k) programs, as well as 403(b), IRA and HR-10 (Keogh) plans. At greatest risk of loss are the self-employed, professionals and small business owners who maximized their plan contributions every year and now have accounts that will approach $1 million by retirement. For most savers, that seems like an unreachable goal, but compounding interest and maximum contributions may make it commonplace for those with good programs.

Where did it all go wrong? To fill a social need, Congress created legislation to encourage taxpayers to set aside funds for retirement. Nobody disputed that saving for the future was a desirable goal and should be encouraged with favorable tax treatment. As a result, motivated company owners used qualified plans in a tax deductible environment to grow their nest egg without the burden of current taxation. Unfortunately, for the IRS, too much money was withdrawn from the tax collection system and it reduced needed tax revenues. So new laws were drafted to make it harder to save in retirement shelters. Today the IRS can effectively penalize a taxpayer if they save too much, withdraw savings too early or too late, and if they take distributions that are too large or too small. Mortimer Caplin, former director of the IRS, summarized it well, “There is one difference between a tax collector and a taxidermist — the taxidermist leaves the hide.”

Congressional budgeters view the huge pool of deferred savings as a cash cow to be milked for future revenue enhancements. For example, when federal unemployment benefits needed to be lengthened in 1992, Congress financed the program by changing the tax treatment on rollovers from qualified plans. They projected that most taxpayers would not jump through all of the hoops creating new tax revenues and penalties to produce the needed funds. Unfortunately, they were right.

If you think you might be one of those exposed to unnecessary taxation. There is specialized computer software available to project tax problems and liabilities for retirement plans, and qualified tax and financial advisors should be consulted to minimize any potential for losses. With creative planning, new strategies recently granted IRS approval could also eliminate many of the obstacles for successful savers. However, action needs to be taken early and the program monitored carefully. Properly done, the value of a qualified plan can be used to fund retirement, and still pass any remainder of the estate to heirs without penalties.

© Vaughn W. Henry, 1995 and 1997

Case Studies and Articles

Improving Success Rates for the Nonprofit Organization

Improving Success Rates for the Nonprofit Organization

Improving Success Rates for Nonprofit Organizations


The key to success for a nonprofit organization’s development officer is to go back to the fund-raiser’s core role. That is to say, improve relationships with donor-clients and develop an extensive knowledge of the charity’s role in the community. Learn enough about current and planned gifting strategies to know when to insert the charity into a client-donor’s financial and estate plan, but do not feel that you must know all the tax and financial tools used. Instead, turn to those professionals who provide the technical expertise on integrating gifts into financial plans and encourage client-donors to seek out those advisors who view the big picture. Become more efficient in conserving the social capital of your donors by learning that every transaction, whether it be a sale of a business or farm, shifting from growth stocks to income mutual funds, or transitioning a family business to heirs is an opportunity to help the donor meet financial goals and still provide needed support for your organization. Only after personal security and family succession issues are resolved will the donor feel that they can address questions about charitable gifts. If the fund-raiser places the family at risk, there is increased opportunity that gifts will not be forthcoming and the ever increasing potential for adverse litigation starts to be a major concern. Disinherited heirs are an unforgiving lot and when they are not made aware of the scope and intent of entire estate plan they can create huge obstacles causing nothing but grief and ill will. To that end, I like to encourage client-donors to create a written family financial philosophy and convey those concepts to their heirs.

If you would like to do joint seminars or workshops on planned giving or estate planning for your board, professional advisers or donors, we have technical resources and materials available to nonprofit organizations to make those strategic alliances more effective. We can help you prepare software presentations with PowerPoint™ and can help you acquire the hardware to present your own seminars to clients and donors. If you do not have the software to evaluate either a CRT or planned giving options, we provide a preliminary analysis for CRAT, SCRUT, NICRUT, NIMCRUT, CLAT, CLUT, CGA and PIF scenarios as a professional courtesy, give us a call.

©Vaughn W. Henry, 1997, 2001


FOR YOUR OWN CRT SCENARIO or try your own at Donor Direct. Please note — there’s much more to estate and charitable planning than simply running software calculations, but it does give you a chance to see how the calculations affect some of the design considerations. This is not “do it yourself brain surgery”. When is a CRUT superior to a CRAT? Which type of CRT is best used with which assets? Although it may be counter-intuitive, sometimes a lower payout CRUT makes more sense and pays more total income to beneficiaries. Why? When to use a CLUT vs. CLAT and the traps in each lead trust. Which tools work best in which planning scenarios? Check with our office for solutions to this alphabet soup of planned giving tools.

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Planning Articles and Links




CRT Case Study: Bill Webster, nearing retirement as CEO of IC Corp., had family working in his growing business. As a primary goal, he wanted to shift his 60% stock ownership to the kids without creating significant income tax or gift tax burdens. Like many hi-tech industries, IC Corporation started on a “shoestring” as a supplier of resins for integrated computer chips. The corporation had significant retained earnings, since profits were consistently plowed back into the rapidly growing business. The firm’s accountant cautioned Bill about the IRS penalty on this surplus and advised him to declare dividends. Mr. Webster resisted that suggestion because of the double taxation penalty. On the other hand, he was unwilling to sell his low basis stock and pay the capital gains tax. Why? The stock sale option would have reduced by nearly a third the $1 million in sale proceeds, and limited his opportunity to reinvest for a comfortable retirement. (see chart below)

A powerful solution existed by creating an IRC Section 664 Trust and transferring Mr. Webster’s stock to this trust. The highly appreciated stock was then redeemed from the trust at fair market value by the corporation and retired. The heirs received control of the business, as their minority ownership was converted to a majority interest when his stock was retired as treasury stock. Additionally, the accumulated earnings penalty was avoided, since the problem surplus was reduced by the company’s stock redemption. Mr. Webster simultaneously established an account funding his retirement without paying any capital gains tax on the transfer of this highly appreciated asset. An additional advantage of this trust scenario allowed his funds to continue growing in a tax-deferred environment and further compound in value. Although this briefly summarized technique required highly competent financial, legal and tax advisors, it offered a closely-held business owner an excellent opportunity to free up otherwise locked in value. IRS control was eliminated, Mr. Webster enhanced his income and the business went to family members in a tax advantaged fashion.

ãVaughn W. Henry, Henry & Assoc. 1996

Springfield, Illinois 62703-5314 [home

Email[email protected]

 Corporate Stock Redemption via CRT


Option A

Keep Asset

Option B

Sell Asset

Option C

664 Trust

Sale of Stock With Zero Basis $1,000,000
Capital Gains (Federal & State) at 31% – 310,000
Amount Invested/Reinvested $1,000,000 $ 690,000 $1,000,000
Income Produced Now at 3% $ 30,000
Income In New Investment at 9% $ 62,900
7% Payout from Trust Earning 9% $ 90,652 *
After-Tax (Combined at 40%) Cash Flow $ 18,000 $ 37,260 $ 54,391
Additional Joint Life Expectancy for 65/64 Yr. Old Married Couple 26 Years 26 Years 26 Years
Total Lifetime Income & Tax Savings $ 468,000 $ 968,760 $1,518,026
Total Increase /Retirement Cash Flow $ 500,760 $1,050,026

The illustrated IRC § 664 Trust calculations were based on the income beneficiaries’ ages of 65 and 64. The current asset, a closely-held “C” corporation, previously produced a return of 3% of market value. IRC Section 7520 rate (7.6%) was used and when assets were sold and repositioned for increased income potential, the new comparable risk portfolios were assumed to earn 9% on their pre-tax yields. As a component of an integrated estate plan, this trust offers business owners and their heirs the opportunity to redirect their “Social Capital” and keep control of assets that otherwise would default to the IRS.

* Average annual payout over projected joint lives of income recipients.

Vaughn W. Henry – Gift & Estate Planning Services. As a professional courtesy, we provide hypothetical CRT evaluations for advisors. See form format.


Case Studies and Articles

Can Capital Campaigns be based on Planned Gifts? – Vaughn W. Henry & Associates

Can Capital Campaigns be based on Planned Gifts? – Vaughn W. Henry & Associates

Can Capital Campaigns be based on Planned Gifts?

While lead trusts generally aren’t promoted like remainder trusts, there are ways to combine the two tools to provide significant gifts to charity today.  Learning about basics is doubly important for advisors to better help donors improve their options and social capital control.  The following case isn’t one suitable for many donors, but the concept has merit for the right circumstances.  For those organizations able to present the idea to a major supporter, it might be the way to get that capital project off the ground without going through a long fundraising campaign or another unpopular bond issue and still help the donor solve financial planning problems at the same time.

Jack Wise, a 66 year old business owner, was approached by a local charity group he’d supported for many years about ways to finance a school district’s youth center.  The community previously rejected an increase in property taxes and school officials wanted a fresh perspective on ways to build the needed facility.  Jack’s financial advisor offered an idea that gave the district new options.  By taking $2 million of Jack’s stock portfolio with modest income earnings of 3% per year, the advisor placed $1 million of the stock into a 6% CRAT to replace Jack’s existing earnings of $60,000 per year.  The remaining $1 million in growth stock was combined with some idle development property worth $2.73 million into a family limited partnership (FLP).  Then 40% of the limited partnership units were contributed to a 6% CLAT designed to produce $60,000 in annual distributions to charity.  The minority interests were discounted by 33% for lack of marketability and control; meaning that the fair market value of assets held by the charitable lead trust were also valued at $1 million.

Once the $1 million in appreciated stock was placed into Jack’s charitable remainder trust, the trustee loaned the school district the $1 million to finance the youth center and commence construction.  The note owned by the CRT requires a payment of 6% interest annually, but where does the school get the funds to pay the note since the youth center isn’t a revenue-producing asset?  It comes from the CLAT payment of $60,000 that passes through their foundation’s hands and back to Jack’s CRAT in order to provide him with the same level of life style he previously enjoyed from the stock and land contributed to his two estate planning trusts.  Besides receiving income from the CRT, an income tax deduction of $522,340 is created and usable for six years.  Additionally, the assets in the CLAT, eventually passing to his heirs, do so for a discounted value of $522,340.  Combined with aggressive annual gifting and other lifetime gifts of FLP units to family members, Jack can pass the $3.43 million plus all the projected growth to heirs for no gift or estate tax while building the Jack Wise Community Center now.

How does this compare to doing nothing?  Jack’s $3.43 million, plus all the associated growth would normally be reduced 50% at death by estate taxes.  By making these three planning tools work within his estate plan, Jack can help a charity fulfill its mission, support a familyphilanthropy, pass more assets to his family and generate an income tax deduction when he can actually make use of it, all without reducing his current income stream.

campaign.gifWhile this case is a little complex for a quick study article, it made good sense to Jack’s advisors and played a major role in his “zero estate tax master plan”.  Learn more about charitable remainder (CRT) and charitable lead (CLT) trusts and find creative ways to introduce them as solutions to client and donor planning problems.

Note to school adminstrators and development officers.

This example of a $1 million youth center was paid for by one donor as a result of creative estate planning.  Tired of sending kids out door to door selling candy, pizzas and magazines?  How about those car washes and bake sales?  Nickel and dime fundraising efforts may build community spirit, but they often irritate donors and there’s plenty of risk in today’s world when peddling stuff on the street to strangers.

It’s become increasingly important to incorporate planned giving into any development program that plans to be around for any length of time.  Long term gifts require an outlook that ecompasses more that putting money on the table today, both new and experienced planners need to make use of the tax planning strategies to help donors be tax efficient in their support of philanthropy.

As an additional note, the July 24, 2000 issue of USA Today had an article, Fundraisers pay for schools’ needs, that contained some interesting statistics concerning the increased use of fundraising activities in schools.

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Case Studies and Articles

Too Much Stock – Too Little Diversification – Vaughn Henry & Associates

Too Much Stock – Too Little Diversification – Vaughn Henry & Associates

Too Much Stock – Too Little Diversification

Vaughn W. Henry © 2000

John Li (50) is a systems engineer for one of the biggest suppliers of sophisticated computer equipment for the Internet.  He and his wife, Katherine, have two girls, both finishing professional programs in graduate school.  As a result of prudent investing, good luck and a wildly successful public offering of his employer’s stock, John is considering early retirement so he can travel and enjoy his hobbies of flying and sailing.  Besides his significant retirement plan account, John has $3 million in zero basis stock in his employer’s company and is in line with qualified stock options to acquire an additional $5 million over the next three years.  Faced with planning for the disposition of an estate of $10 million (almost all of it in an undiversified portfolio), John and Katherine decided that they’d like to build a “Zero Estate Tax Plan” into their estate planning.  In short, they’re willing to give to charity those assets that would otherwise default to the IRS in the form of estate and capital gains taxes.  As a part of this strategy, they will also make aggressive gifts of stock to their two daughters and other family heirs over the next few years.  By freezing estate growth and squeezing the value of the assets, the Li’s estate planning team will be able to eliminate the unnecessary taxes.  Additionally, it will provide an excellent retirement income stream and leave their heirs in control of a family influenced charity funded with unused retirement plan assets and stock proceeds from their charitable remainder trust (CRT).

Sell CRT
Net fair market value (FMV) $3,000,000 $3,000,000
Taxable gain on sale $3,000,000
Capital gains tax (20%) at federal level $600,000
Net amount invested $2,400,000 $3,000,000
Annual return of reinvested portfolio 10% 10%
   Reinvested for 10% annual income produces $240,000
   Trust payout of 5% (averaged with 10% returns over trust term of 40 yr.) $433,190
Annual average after-tax cash flow @ 39% tax $146,400 $264,246
Years – projected joint life expectancy 40 40
Taxes saved with $579,600 deduction @ 39% $226,044
Tax savings and cash flow over 40 yr. $5,856,000 $10,795,878
Total increase in cash flow $5,856,000 $10,795,878
Total value of asset in estate in 40 yr. $2,400,000 $0
Estate taxes on this asset at 55% $1,320,000
Net value to family $1,080,000
Total insurance expense for wealth replacement $0 – $530,000
Insurance benefit in wealth replacement trust $0 $3,000,000
CRT remainder value to family charity $0 $21,119,966
Total value to Li family from this asset only $1,080,000 $23,589,966

How does this work?  The stock that John owns is publicly traded, so its value is readily ascertained and is easily transferred to the Li Family Charitable Trust.  This §664 CRT will take the highly appreciated stock and sell it without current tax liabilities and reposition it into a more balanced portfolio of equities designed for both growth and security.  The CRT, with John as trustee, will buy and hold stocks and mutual fund shares so that most of the portfolio will continue to appreciate while John and Katherine, as income beneficiaries, receive quarterly payments of 5% of the trust’s value every year.  They’ve made the decision that leaving each daughter with a $5 million inheritance is part of their family’s financial goals, so with some stock and life insurance held in trust, the two girls will be well protected for the future.  Everything else in their estate will be either spent during retirement or left to their charitable trust when they pass away.   After examining the numbers, the Li family felt that it made great sense to re-exert control over their social capital and follow through with their plan. Since John felt a need to sell in order to diversify his unbalanced portfolio, the only comparison to be made was between selling – paying tax – reinvesting the net proceeds and contributing the stock – reinvesting inside the CRT.   By combining a charitable remainder trust with a wealth replacement trust for their heirs, John leaves his family in control of the estate and produces a “Zero Estate Tax Plan” that suits their planning goals with a family financial philosophy of wealth preservation and charity.


Henry & Associates


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