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Avoiding Malpractice III – Henry & Associates

Malpractice Coverage – III

Don’t Leave Home Without It

(third in a series on design and implementation issues)


imageTo 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.