CRUT/CRAT [how to set up charitable trust?]

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MN Finance
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CRUT/CRAT [how to set up charitable trust?]

Post by MN Finance »

Beyond google, curious if someone can give any considerations for how to most efficiently set up a charitable trust. 1) are good template documents available in the public domain? 2) do we need a 3rd party to act as trustee? 3) does it require an additional tax return (hoping to set it up so it does not?) 4) do investments need to follow something along the prudent investor rule?

Thanks much!
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The529guy
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Re: CRUT/CRAT [how to set up charitable trust?]

Post by The529guy »

MN Finance wrote:Beyond google, curious if someone can give any considerations for how to most efficiently set up a charitable trust.
I would consider whether I could achieve my philanthropic goals with a donor-advised fund.
Last edited by The529guy on Tue Dec 09, 2014 10:13 pm, edited 1 time in total.
mnaspbh
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Re: CRUT/CRAT [how to set up charitable trust?]

Post by mnaspbh »

MN Finance wrote:Beyond google, curious if someone can give any considerations for how to most efficiently set up a charitable trust. 1) are good template documents available in the public domain? 2) do we need a 3rd party to act as trustee? 3) does it require an additional tax return (hoping to set it up so it does not?) 4) do investments need to follow something along the prudent investor rule?

Thanks much!
I looked into setting one up several years ago. They're not terribly straightforward, and taxes can be complex. After the legal costs to set it up and ongoing fees, it just didn't make sense for less than a 7-figure amount. Some institutions will set one up and run it for you, but it's likely there will be high fees (2-5%+) that they may not always make clear.

I decided to go with a donor advised fund instead.
Gill
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Re: CRUT/CRAT [how to set up charitable trust?]

Post by Gill »

The expenses and complexities of operating a charitable foundation have made them inappropriate for anything less than ten million or more. Many smaller foundations, as well as those of significant size, have relieved themselves of this expense and burden by folding the foundation into a donor advised fund. Look into a DAF. It will probably more than meet your charitable needs.
Gill
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MN Finance
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Re: CRUT/CRAT [how to set up charitable trust?]

Post by MN Finance »

The529guy wrote:I would consider whether I could achieve my philanthropic goals with a donor-advised fund.
That's certainly on the list, but a charitable remainder trust is a better fit assuming the administration is reasonable.
mnaspbh wrote:I looked into setting one up several years ago. They're not terribly straightforward, and taxes can be complex. After the legal costs to set it up and ongoing fees, it just didn't make sense for less than a 7-figure amount. Some institutions will set one up and run it for you, but it's likely there will be high fees (2-5%+) that they may not always make clear.

I decided to go with a donor advised fund instead.
Certainly creating a trust document has a nominal up front cost, but other than that, what are the ongoing fees? I assume I don't need a separate TIN and tax filing, but possibly a little work on our our taxes each year. Even if wrong on that, then a TIN and additional tax return aren't arduous. This is the meat of my question; what ongoing maintenance is there really? A DAF isn't free either, so there's a break even carrying cost on the trust relative to the DAF.
Gill wrote:The expenses and complexities of operating a charitable foundation have made them inappropriate for anything less than ten million or more. Many smaller foundations, as well as those of significant size, have relieved themselves of this expense and burden by folding the foundation into a donor advised fund. Look into a DAF. It will probably more than meet your charitable needs.
Gill
I'm not understanding. I can't set up a charitable remainder trust for 500k, it has to be 10M?? I know that's not true, so you'll have to spell it out for me.
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The529guy
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Re: CRUT/CRAT [how to set up charitable trust?]

Post by The529guy »

MN Finance wrote:
The529guy wrote:I would consider whether I could achieve my philanthropic goals with a donor-advised fund.
That's certainly on the list, but a charitable remainder trust is a better fit assuming the administration is reasonable.
My understanding is that you can set up recurring grants from a DAF after you're gone:
https://www.vanguardcharitable.org/indi ... o_charity/

Is that goal what makes the charitable remainder trust a better fit? I'm interested in learning more.
Last edited by The529guy on Tue Dec 09, 2014 10:12 pm, edited 1 time in total.
bsteiner
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Re: CRUT/CRAT [how to set up charitable trust?]

Post by bsteiner »

MN Finance wrote:... curious if someone can give any considerations for how to most efficiently set up a charitable trust. 1) are good template documents available in the public domain? 2) do we need a 3rd party to act as trustee? 3) does it require an additional tax return (hoping to set it up so it does not?) 4) do investments need to follow something along the prudent investor rule?
1. Yes, though the IRS sample forms are just a starting point.

2. No.

3. Yes.

4. Yes.

Any good trusts and estates lawyer should be able to draft a charitable remainder trust (CRT).

As is often the case, much of the value is in the decision making process, including whether to create an annuity trust or a unitrust, and the selection of the payout rate.

For those not familiar with CRTs, a CRT is a trust that provides payments to one or more individuals for life or a term of up to 20 years, whereupon the trust ends and the balance goes to charity. The value of the charity's interest has to be at least 10% of the initial value of the trust.

The main benefit is that the trust is tax-exempt (though distributions are generally taxable, first as ordinary income to the extent thereof, and then as capital gains to the extent thereof). A CRT lets you sell an appreciated asset that you were otherwise going to sell, and diversify without current capital gains tax. The capital gains tax is effectively spread out over a long period of time. The income tax benefit of the deferral approximately offsets the value passing to charity.

When the capital gains tax rate was 15%, we didn't do very many CRTs. Most people simply paid the capital gains tax. The taxpayer could often contribute the appreciated asset to a trust of which he/she could be a beneficiary that would be set up in a state that didn't have a state income tax, so that there wouldn't be any state income tax on the sale.

With a 20% tax rate on capital gains, plus the 3.8% net investment income tax, we're doing more CRTs now. They work best for people who want to sell an appreciated asset without incurring current capital gains tax. While the family usually comes out about even, they get to effectively make a substantial transfer to charity at little or no cost.

There's some cost, complexity and loss of flexibility with a CRT. There are some legal fees to create a CRT. The amount varies considerably from one case to another depending upon how much time the client requires in the decision making process. However, it's much easier now than it was many years ago, since we have software that will analyze the choices. There's some cost to doing the annual income tax returns, but the effort will be less after the first year. There's some loss of flexibility since you can't change the way the annual payments are determined, so you would only do it with a portion of your assets.

The very wealthy don't need to create CRTs. They can simply give away the asset without needing to receive annual payments.
MN Finance wrote:...Certainly creating a trust document has a nominal up front cost, but other than that, what are the ongoing fees? I assume I don't need a separate TIN and tax filing, but possibly a little work on our our taxes each year.
...
I'm not understanding. I can't set up a charitable remainder trust for 500k, it has to be 10M??
You can certainly create a CRT with $500,000. That's probably in the middle of the range of the size of the CRTs I've done.

Creating a CRT isn't extremely expensive, but the cost is more than nominal, since in addition to the drafting, there will be some time in the decision making process.

A CRT will need to file annual tax returns, and it will need a taxpayer identification number. Obtaining a taxpayer identification number is not difficult. There will be some additional effort for the first return, especially if the accountant isn't familiar with the returns for CRTs, but it should be easier after the first year.

Some of the other comments were about private foundations rather than CRTs. CRTs and foundations are very different. Creating a foundation is very much a personal decision. I'm comfortable creating a foundation with $1 million, though there would be more economy of scale if it were larger.
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