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Options for CRT Beneficiaries

10-17-24

Speaker: Evan Unzelman, CEO, CRT Experts, LLC

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Synopsis

Evan Unzelman, CEO of CRT Experts, presents the options available to income beneficiaries of charitable remainder trusts (CRTs): selling the income interest to a third-party buyer, using the income interest to create a new CRT for heirs (CRT rollover), and gifting the income interest to charity. He addresses the tax treatment/considerations, how each option works, common reasons CRT beneficiaries decide to pursue each option, and walks through a case study based on a recent transaction to demonstrate how a CRT income interest is valued.

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Webinar Transcript

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Welcome

 

My name is Evan Unzelman.

 

I am the CEO of CRT experts on behalf of all of us CRT experts, thank you for joining us today to discuss options available to income beneficiaries of charitable remainder trusts.

 

Before we jump in, just a quick housekeeping note, and then we'll give some brief background on us here as CRT Experts.

 

We are recording the webinar, and all participants will receive a link where you can access that rerecording. We'll also put it up on our website if you want to download it.

 

We'll also give you a link to Vimeo where you can download it.

 

If you requested a recording of the webinar, because you couldn't make it today you are welcome to you as well.

 

Just a brief background on CRT experts. For several of us here at CRT experts, we have spent our entire professional careers working with charitable remainder trusts.

 

For me personally, in the early 2000s right out of school, I was tasked with developing a secondary market for the income interests in charitable remainder trusts.

 

We’ll learn this and talk about this today.

 

The income interest in a CRT is what's commonly referred to as a split interest trust.

 

There's no one party that owns the trust.  You, the income beneficiary, own the right to receive income from the trust.

 

Your interest is commonly called income interest and charity owns what's left in the trust either when you pass or maybe the last of you and your spouse pass. The charity owns the remainder interest, which is what's left the income interest in a charitable remainder trust is a capital asset, so that gives you the ability to do with your income interest what you can do with other capital assets.

 

You can sell it, give it to charity, or use it to create a new CRT for kids. And we'll talk about all those options on today's webinar presentation.

 

From the early 2000s in 2003, I oversaw my first sale transaction, the sale of income interest. 

We've overseen thousands of those over the last 20 plus years now and that's where we do most of our work here at CRT experts is working with individuals who have and families who have established CRTs usually quite some time ago.

 

And they're interested in learning what the options they have with respect to their income interest today and where it's applicable.

 

We're of course happy to help them pursue one of those options, but it all does start with that review of the income interests.

 

We also work on the front end of CRTs designing CRTs, working with attorneys to implement CRTs and administering CRTs as well.

 

But the focus here at CRT experts is what we call secondary planning for charitable remainder trusts. And that involves the options that we'll talk about here today.

 

We've looked at north of about 9,000 CRTs now over the last couple of decades, so we've reviewed a lot of CRTs and we use that experience to help not only people who have CRTs, who want to exit the trust or roll it over for their children but also people who are just having administrative issues with their CRT as well.

 

We're headquartered here in Leesburg, Virginia just outside of Washington DC.

 

You can see our office building up there on the slide.

 

So whenever I'm talking on this particular subject whether we're talking about exiting a CRT or in effect changing a CRT, I always start off with an analogy, and if you've heard me present before, bear with me because you've surely heard this I always start with what I call the house analogy.

 

When we think about buying a house or building a house, one thing that's probably true is we don't go into that decision with the mindset that we're necessarily going to live in that house forever.

 

You know, there's a lot of things in our lives that would lead us to someday sell the house, whether it's the kids growing up and hopefully moving out, a warmer weather state beckons, lower tax state beckons, divorce, death of a spouse, remarriage, retirement etc.

 

The point is, just because we will, we will potentially someday sell the house, doesn't mean that it was a bad decision to buy it or we didn't derive utility from the home and it didn't work perfectly well for us when we were living in it.

 

We think this is analogous to CRTs because we want to make the important point that this is not an anti CRT discussion.

 

We'll see on the next slide, CRTs, they're powerful tax planning vehicles that are put in place for good reasons and they usually work well for quite some time.

 

But there's this combination that you'll hear me refer to throughout the presentation of a trust that's irrevocable and can't change and a really long duration.

 

Most CRTs are tied to people's lifetimes. So, they're around, they're around 20, 30, 40 plus years. And because that trust can't flex along with our changing life, many times, in many cases, there's a misalignment as we get deeper into the CRT lifecycle.

 

So just like a house, we need to make the decision with respect to what we're doing with

that asset. Well down the road.

 

We need to break that apart from the decision when we, when we bought the house or created the trust.

 

We'll compare CRTs a lot to real Estate. You know, the income interest in a CRT Is a capital asset, just like a piece of real estate.

 

But they're analogous in this way as well. They work well, usually for quite some period of time. It's just this natural misalignment that can occur that can lead to these misalignments.

 

Fortunately, there's pretty good flexibility and that's what we'll talk about here today.

 

Just quickly, we'll hit on the pros and cons.

 

Let's go back to when you created your CRT. When you created your CRT the motivator for you was probably tax.

 

Most CRTs are funded with appreciated property whether it's a piece of real estate that's highly appreciated, closely held stock, publicly traded stock, that's appreciated.

 

We want to sell that asset, diversify that position, but we don't want to pay the capital gains tax on that on the appreciation.

 

So, we can donate the property to A CRT. We give up liquidity of the property. However, the

CRT can sell it.

 

CRTs exempt doesn't pay any tax, and we retain that income stream moving forward.

 

Why do people create CRTs? By far the most common reason is just that we're, we're not

Avoiding the tax, we're deferring it.

 

If we want to altogether avoid the tax, we would've just given the asset outright

to charity.

 

So, what the CRT does is it pushes that tax into the future.

 

We pay that tax on the CRT income. In fact, we'll probably almost certainly pay

a higher tax rate on that CRT income than we would on that, on the appreciation, the capital gain upfront.

 

But it's worth it to defer that tax into the future. We do receive a charitable deduction for what the IRS projects will eventually go to charity.

 

But because that's usually quite some time into the future because these are tied to

people's lifetimes in most cases and their life expectancy when they create the CRT is usually quite a way out into the future.

 

And we're present. The IRS is present valuing that charitable payout to charity.  They're bringing that back to today's dollars. It's usually a pretty small percentage, usually around 10%, 15%, 20% of the assets that go into the CRT that we get to take our upfront charitable deduction and of course, we retain that income stream from the CRT.

 

So from a pretty early point in the overall lifecycle of the CRT the value with respect to the trust is really solely rooted in that income stream. You know, we defer the tax in year one.

 

We diversify that asset in year one, when the trust will typically sell it pretty quickly.

That's when we take or start taking our charitable deduction.

 

So, from a quick point overall in the life of the CRT, the value, our value with respect to the CRT is rooted in that income interest, that future income stream.

 

So, like anything or most things in life there's drawbacks. So, we've talked about, we give up that liquidity.

 

This is an irrevocable trust. And so, this combination that I've referred to and I'll continue to refer to is this combination of an irrevocable trust.

 

The key terms cannot change the key terms, the payout rate, who the income beneficiaries are, the type of CRT, those are set in stone as soon as that CRT is executed.

 

But when we look at the duration of the CRT, it's usually quite some time decades into the future.

 

So, while it's a perfect fit at inception, what happens over time, as our life starts to change, that trust can't flex with our lives, we can't make adjustments to the trust

to reflect on our current situations.

 

And that's what can quite naturally lead to a misalignment between the situation we're in today and the situation we were in when we created the trust.

 

So that's what we hear a lot from sellers of income interests is the trust just ran its course it was a great decision to set it worked well for years, but we're just in a different situation now and we're shifting our planning goals.

 

And we want to look at what our options are with respect to the CRT. Fortunately, even though these are irrevocable, and they often are misalignments, we have good flexibility

and that's what we're going to talk about here today.

 

Before we get to the options, though, I want to talk about where the tax and legal authority is here.

 

I understand I'm not speaking to tax attorneys, but, the tax and legal here is, is actually quite straightforward.

 

So, the ability to a sell an income interest in “A” CRT and “B” that tax treatment, that preferential tax treatment, the capital gain tax treatment is rooted in a 1972 revenue ruling.

 

You see that up here on, on the screen.

 

What that revenue ruling says is that an income interest, a life interest in a trust, not just a CRT, any trust is a capital asset.

 

If you sell that, if there's a willing buyer and a seller, that can be sold.

 

The sale proceeds are capital gain property in the hands of the seller.

So, any CRT that's been out there for a year or more, the income beneficiary of that CRT,

the income beneficiary or beneficiaries own the income interest, that capital asset, they own a capital asset that they, they can sell.

 

The proceeds are going to be long-term capital gain property.

 

So, and most people don't, but we encourage them to look at your CRT income interest,

that's a capital asset.

 

Look at that alongside your other capital assets, your real estate holdings, or you might have a closely held stock in a business, or a private company.

You may have publicly traded stock.

 

Your income interest in your CRT is a capital asset, and you can do with that just what you can do with other capital assets.

 

So those are what these options, what you can do with it are what we're going to look at here today.

 

We're going to look at the option to sell that to a third party.

 

Which is the most out of these options by far, the most commonly utilized technique.

 

We're going to look at what we call CRT rollover, where we're going to use that income interest, that capital asset to create a new CRT usually for heirs, children, or grandchildren.

 

Sometimes it may be for a spouse that may not be on our current CRT.

 

And we'll also look at the option of giving that income interest to charity and,

and receiving a charitable deduction today.

 

What makes our job easier on anyone who's going through this process as an income recipient of a CRT, is that these options are quite distinct.

 

The outcome is quite different if we're selling the income interest versus rolling it over

to a new CRT versus gifting to charity.

 

Because those options, those outcomes are so different, all we need to do is determine what's the objective here of the income beneficiary?

 

Once you understand what it is you own and what your objectives are with respect to that income interest there's going to be one option that likely will line up well with your goals and objectives.

 

And that may very well just be letting the CRT run its course and continue to take income.

 

But one of these alternatives where the facts fit could make some sense.

 

So, we'll talk about the sale option.

 

This is when I look at who we are trying to benefit with the planning.

 

So, if we're going to utilize the sale option we're looking at what's going to get me the most value personally after tax value, going to leave the most after tax dollars in my pocket.

 

That's going to be the sale option. The rollover option.

 

The goal is typically we're trying to transfer the value with respect to the CRT, this income interest, that value, we're trying to transfer it to the kids, and we're transferring it via an income stream from a new CRT.

 

And then the third, we're trying to benefit charity.

 

So, because those who we're trying to benefit ourselves, our kids, charity, once we uncover, okay, this is what the goals are, we can match up the appropriate option.

 

So, let's talk first about the sale of the income interest.

 

We'll go through a case study, and we can use that case study not only to sort of bring to the real world the sale, but also we can then use that to look at the rollover and gift options as well.

 

So, with the sale in essence, what the sale does is it enables the, the income beneficiary

of the CRT to convert that future income stream into a cash payment.

 

Today in the process of selling the income interest there's also a change of trustees.

 

So, most CRTs are what are commonly referred to as self-trust deed, meaning if you're the income beneficiary you're probably also the trustee.

 

The trustee is who's responsible for the CRTs administration, that tax return, that 5227 that the CRT has to file every year in connection with the sale.

 

If you sold your income interest, you would resign as trustee and appoint a successor trustee, the buyer, or one of the buyer's advisors.

 

That is what will shift the administrative responsibility off of your shoulders and put it onto the buyer, that change of trustee.

 

So, if a sale was completed this year or even early next year, most of the time, what that means is you are relieved from all future responsibilities, all future tax returns

for the CRT, including the 2024 return.

 

In today's environment, we're also starting to see we'll talk about the tax treatment here in more detail.

 

On the next slide we're starting to see the sale used as a hedge against rising tax rates,

potentially higher tax rates in the future.

 

The sale enables us to do is effectively not only converting that future income into a cash payment today, but we're converting that into a cash payment that's taxed at the current long-term capital gain rate.

 

Which I don't think that's going lower and a lot of folks are worried about that going higher.

 

And a good way to hedge on that is to realize that capital gain at the current rate.

 

Before we get into what I call the benefits and drivers, who are the buyers?

 

We're asked this a lot, but first who are not the buyers.

 

We at CRT Experts are not a buyer.

 

We broker the sale for a fee.

 

We'll talk about that in a few slides.

 

Charities are not buyers.

 

Charity could not buy the income interest.

 

You would no longer have a non-charitable beneficiary.

 

So the buyer pool that we've developed and worked with are all taxable.

 

Whether it's taxable individuals or taxable entities.

 

But they're usually going to be tax advantaged in some way.

 

So, we have a taxable entity or individual with some form of a tax attribute.

 

So common examples are entities with net operating losses or NOLs as they are commonly referred to.

 

If you are familiar with an NOL, you know that to use up that loss, that attribute, you need income.

 

And so they're looking for income to use up that particular tax attribute.

 

Individuals with capital loss carry forwards, individuals with unused charitable deductions.

 

I mean, we're not picky.

Ultimately, what we want to do is match up someone who has a CRT income stream

with a buyer who's going to pay a lower tax rate on that same income stream.

 

That tax differential then gives us is the broker of the sale, the ability to arrange the sale at a price that would make sense for both sides.

 

This is when we're talking about the benefits and drivers.

 

This is one of the first things that all hit on.

 

This is not typically a driver, but if we just solely look at the sale of an income interest through purely an economic lens, we can usually demonstrate that you would be able

to sell your income interest at full value.

 

Oftentimes a little bit above the full value of keeping it.

 

And most of the time, the reason for that is you're selling it to someone or some entity that's going to pay a lower tax rate on the distributions.

 

So, if I have a CRT and I'm paying, let's say a 20% effective tax rate on my distribution, so I'm keeping 80 cents on every dollar.

 

If John Doe here can take that same income stream and not pay tax on it, so he's keeping a hundred cents on the dollar, there's that 20 cents spread there that would allow the broker of the transaction in our case, CRT Experts to arrange a sale at somewhere between 80 and 100 cents on the dollar.

 

So, this is an important distinction between the sale of an income interest and most sales of future cash flows.

 

In most cases, if I'm selling a future stream of income, I'm going to be forced to take a discount in exchange for that upfront liquidity.

 

Most of the time, unless you're not paying tax, which would be rare, if unless you're not paying tax on your CRT income, we can probably arrange a sale of the income interest at the full value of keeping it.

 

Now, this is not a driver.

 

It's not, we're not getting a big financial premium here. I mean, people don't sell their income interest because they're netting 20% more than the after-tax value of keeping it.

 

But the fact that we can get the, the full value, fair value does set this apart in a good way from most sales of, of future cash flows.

 

Another benefit, not often a driver though, as I mentioned, we are starting to see it in this particular environment is taxation.

 

If I can sell my income interest for a hundred thousand dollars and I run the numbers,

and based on my life expectancy and investment, expected investment return, I think

that I would get that same amount out of that CRT over my remaining lifetime.

 

On a pre-tax basis, I'm indifferent.

 

I can sell the income interest for a hundred thousand, or I can wait the rest of my life

and get that a hundred thousand out from the CRT.

 

While I'm different on a pre-tax basis, I'm not going to be on an after-tax basis.

 

When we apply tax to both of these options, as we've talked about, the sale is capital gain.

 

So, I'm going to pay long-term capital gains tax on that a hundred thousand.

 

Whereas if I take that a hundred thousand out of that CRT over whatever my life expectancy is, I'm at least going to pay some amount of ordinary income tax on that depending on how the trust is invested.

 

And the type of CRT, it may be mostly or all ordinary income tax.

 

So, the hundred thousand dollars I would receive from selling is taxed much more favorably than that a hundred thousand dollars of CRT income.

 

Now, when we factor in the fact that tax rates may rise that would make the sale from a tax standpoint it drops down into the drivers.

 

You know, in an environment where we are concerned about rising tax rates the sale of the income interests is now going to drive the transaction in many cases.

 

So, when we think about it, CRTs, as we talked about, they're deferral vehicles,

 

They're deferring my income to the future.

 

If I think tax rates are going to be lower in the future, that's great.

 

I'd rather defer not only do I not have to pay the tax, now, I'm going to pay it at a lower rate if tax rates are higher in the future.

 

Of course, the opposite is true.

 

So as we start to see some concern over rising tax rates, we start to see more and more the sales driven by that particular benefit selling to hedge on that future tax increase.

 

But, to go up a little bit higher on the bullet points here into drivers we're asked this from people who have CRTs and advisors.

 

What are the reasons you hear from, from sellers?

 

We’ll hit on a couple of the most common simple, what we call simplification.

 

What we hear is I am trying to simplify my financial affairs.

 

I like the sale in the sense that it rids me of the administrative responsibility for the trust.

 

I no longer have to deal with that 5227 each year.

 

I can shift that off, off to the buyer.

 

So, simplification of financial affairs, just getting tired of that administrative burden

of the CRT, in many cases, we're concerned that a spouse is going to have to take over trusteeship if I pass before my spouse, I'm concerned about that.

 

So, simplification of financial affairs is certainly a driver.

 

Then the second, which is, which is a more broad reason, is just the flexibility of cash.

 

Most people have CRTs, as you would imagine rarely will just need the liquidity.

 

I would characterize it more as a desire.

 

I'd rather have this cash, then wait the rest of my life for this income from the CRT because I want to do this with it.

 

And I could sit here until tomorrow and talk about what this means.

 

You know, everything from investing in businesses to buying a new house to family.

 

And very often what's happening with the sale proceeds, revolve around children

and grandchildren, heirs, so there's a lot of different things we can do.

 

We hear everything from, I want to invest in a child's business, I want to open a 529 plan for my grandkids, just want to make gifts outright to my children or grandchildren today.

 

I'll invest it, spend some, and leave whatever's invested for the kids through the estate.

 

So, there's a lot of different ways we can benefit, children and heirs.

 

But they're all sort of under that broad reason, which would be I'm retaking control

of these assets for my kids or my grandkids.

 

We always joke here, we wish that the kids always got to make the decision right?

 

So, if my parents have a CRT there's no direct benefit to me.

 

You know, my parents take the income and when they die, everything goes to charity.

 

If they sell that income interest and retake control of those assets, and I'm part of their planning and they don't spend it all I may get some of those sale proceeds, may get all of them.

 

So, from the kids' standpoint, there's certainly incentive.

 

Unfortunately, they're not the ones making, making the decision.

 

It's something we hear a lot, particularly as people get older and begin to realize when I'm gone my family loses out on what's left in this trust. I die, everything goes to charity.

 

So, I can sell, retake, control, personal control of those assets and use those to help my kids and grandkids in whatever way.

 

Those are some of the more common reasons.

 

Obviously. It's what I call case specific, person family specific decision.

 

What our job is to put the options in front of you and allow you to make that decision.

 

And that's where everything starts.

 

We'll talk about how it works, but everything starts with the review.

 

We'll talk about what we need to review your CRT.

 

We don't need any documentation, it's three pieces of information and of course, we're not going to charge for that.

 

Everything starts with the review, understanding what I own, what I can do with it.

 

And we'll attach numbers to those options.

 

And whether it's a fit or not, you're going to be educated, right?

 

You're going to be enlightened with respect now I know what I own and what I can do with it and what that would, would be worth if the decision is made to proceed.

 

You know, the first thing I'll say is if you go to our website and look at testimonials from sellers, one of the common themes you'll see is this is easier than I thought.

 

Admittedly on the surface this is a niche transaction.

 

There's only 90,000 CRTs in the country, so this is not a common vehicle and this is not a common transaction in general to us.

 

It is, you know, it's all we've done.

 

So, what we've done over two plus decades is it's just streamlined the process.

 

You know, we are very proud of the fact that we hear those when we get those testimonials. So often is revolves around how easy it was to complete the transaction.

 

And so our closing team will guide the process from beginning to end.

 

It's typically a two-to-four-week process from Greenlight. Yep. Let's move forward to a completed transaction cash and in your bank account.

 

So, once you give us that green light, at that point we would need some documentation.

 

We'd need the trust agreement and the prior three tax returns.

 

We'll then prepare the sale documents.

 

Those go out to buyer and the seller.

 

Everyone signs, they can be signed electronically via DocuSign, or we can overnight physical copies for wet signatures.

 

Once the documents are fully executed, our closing team will send those to all parties for their records. And then we're off to closing.

 

The closing itself, it's an escrow style close.

 

It takes place at Wells Fargo Bank under the supervision of an escrow agent.

 

It's a short escrow, typically a day at most, two days inside of escrow.

 

The buyer funds first, the trust is then moved into escrow.

 

If the trust arrives in escrow before 3:00 PM Eastern, we can turn around your payment from buyer escrow same day.

 

It's a very quick close that's done at Wells Fargo Bank.

So, much simpler than you would probably expect.

 

And again, once you sell that income interest at closing the cash payment is paid to you the seller.

 

The income interest is transferred to the buyer. And along with that, the trustee, a change of trustee that we talked about shifts the administrative responsibility to the buyer and is effective on the closing date.

 

So, I wanted to go through a recent transaction that we completed.

 

This is for Ronald and Sharon Bump.

 

We've rounded the numbers off a little bit, but he was nice enough to give us a testimonial.

 

He's willing to speak with other potential sellers, and we're going to look at their income interest.

 

As a way to get our arms around how does this sort of work in practice here?

 

Ron and Sharon created their created a CRT in the 1990s when I believe he sold a business.

 

The CRT pays them about or about 7% a year.

 

There is about $475,000 in the trust.

 

Like many income beneficiaries it was a great fit in the 1990s, but in 2024, they're just in a different position.

 

And their financial advisor contacted us, said, Hey review the trust, show us what options we have.

 

We did the review and they ended up selling their income interest.

 

We're going to go through the valuation process here.

 

So, what Ron and Sharon would be selling, and what a buyer would be buying is this income interest, the future income stream.

 

When we go to value that income interest it's really not a complicated valuation.

 

We just have three variables of which is already known.

 

The payout rate of the CRT, and in Ron and Sharon's case 7%.

 

Yours might be 5%, 6%, 7%, 8% maybe higher than that but that fixed percentage.

 

What we also have to estimate is the duration of the income stream.

 

If I sell my income interest the trust itself, and this is important, the trust is not affected, we cannot affect that trust.

 

The CRTs an irrevocable trust.

 

If I sell my income interest to John Doe, the income stream remains tied to my lifetime,

still pays charity at my debt, it's still a 7% CRT so nothing with the, with the trust changes.

 

I have just in exchange for a lump sum of cash, I have redirected the income stream to a third-party buyer.

 

So, when we're looking at in our case, Ron and Sharon selling and what's the buyer buying.

 

It's a stream of income that's tied to their, their lifetime.

 

So, the first thing we need to do is estimate how long do we expect that CRT to pay out.

 

And that's of course going to be based on life expectancy.

 

We use three tables. We'll look at that on the next slide.

 

And those three tables, which will usually give us different life expectancies or joint life expectancies, that allow us to put a valuation range to estimate the value of the income interest.

 

Uh, the next thing we need to estimate is the future investment return. Most CRTs pay 5%, 6%, 7%, 8%.

 

What we would usually recommend is just peg the investment return to the payout rate,

and we'll talk about that here in the next slides.

 

That leads to a simple analysis. It's earning and distributing 7% a year.

 

It's just x amount per year. And that's what we're valuing.

 

So, let's look at this for Ron and Sharon, first thing we're going to do is estimate that duration.

 

How long do we think that CRT will pay out?

 

We're going to look at three life expectancy tables which you see up here on the screen 2010 cm.

 

That's the IRS table. The table that the IRS requires when you, when you create a CRT

for tax deduction purposes, so that's the IRS is estimating you're creating a CRT is how long are you going to live? What's that going to pay out? What's left for charity?

 

That's what your deduction is on a present value basis.

 

That's the table they're using to estimate life expectancy.

 

The second table if you have a retirement account and you're taking what’s commonly referred to as RMDs required minimum distributions, that calculation of the RMD is based on another IRS table, and so we'll look at that table.

 

That'll typically be a year or two longer than the 2010 cm.

 

Then the third table, which is in virtually all cases going to be the longest life expectancy is the 2012 IAR table.

 

That is a table derived from more recent data, but it also incorporates mortality improvements. So, this is going to have the longest life expectancy.

 

If we see in Ron and Sharon's case, we have an 85 and 82-year-old we're looking at their joint life expectancy.

 

We can see that 2010 cm table had them at 11 years.

 

The RMD table at 12 years,

 

IAR table at 13.

 

So that 11, 12, and 13 years, of course, are, when we're looking at the trust is going to pay for 11 years, 12 years, 13 years, we're going to have different values based on each of those durations. So now we know the duration.

 

So the next thing we need to estimate is 11 to 13 years, but what's it going to pay out each year over that time?

 

As I mentioned, in Ron and Sharon's case, they have 7%.

 

That's a very common payout rate.

 

As long as it's 9% or lower, we usually would recommend just peg the expected return just equal it to the distribution rate.

 

That way we've got a much simpler analysis here.

 

What we would recommend is look at is a benchmark that we're using to assess the sale price.

 

We'd rather overstate it than understate it, so we want to use better or best-case assumptions when we're putting this together.

 

But most of the time, if we have that 5%, 6%, 7%, 8% payout rate we'll just assume an equal investment return.

 

In Ron and Sharon's case, they've got $475,000 in a CRT, and that's distributing 7% a year. And we'll just assume that it's, it's earning 7% a year net of fees.

 

So, 7% of $475,000 is $33,250 and that's going to be consistent over time.

 

Now we have a series of cash flows, $33,250 per year, and we know it's 11 to 13 years.

 

Now we can put all this together to arrive at the value of that income stream.

 

This is a screenshot from our review of the bumps income interest and you can see that depending on which life expectancy we're using, the value of this income interest is worth between $249,200- $78,000.

 

And you can see those three values right there in yellow.

 

Real simple or easy calculation to confirm on your own, Microsoft Excel has a formula called the net present value NPV formula. You can use that.

 

 

There's probably thousands of these calculators online. You can see a screenshot up there of one of those, so it is easy to confirm that.

 

Ultimately what if we take, we would generally say, okay, let's, when we're looking at this range, let's look at the top end of that range.

 

That's typically where the income interest will sell.

 

So, if we look, if we take that value, the $277,900, we're going to assume Ron

and Sharon lived to their, the longer of those three, the 13-year life expectancy.

 

What this is telling us is the right to receive $33,250 per year over the remaining lifetimes of, in this case, an 85 and 82-year-old, is worth about $270,800 in today's dollars.

 

Another benchmark that we will always provide, it’s not as useful because it's always almost always going to be below that, even the bottom end of that valuation range we just looked at.

 

But nevertheless, another benchmark in that is the IRS benchmark for the income interest.

 

So, this is when you set up your CRT, the IRS values both interests in the trust and the value of the charity's interest.

 

The remainder interest is what the tax deduction is.

 

So here we can run that same calculation and just look at the other interest, the value

of the income interest.

 

So, you can see this is a screenshot from our software called Crescendo Interactive and this is showing us that Ron and Sharon's income interest.

 

The IRS based on using their own interest rates, their own life expectancy table, we saw 2010 cm.

 

The IRS would put a value of about $228,000 on their income interest and what now we can do is we can put all of these values together, and I mentioned earlier they were able

to sell their income interest for $300,000.

 

So, this is very typical in terms of you're able to sell it right at sometimes, like in this case, a little bit above that the top end of that valuation range.

 

But we've got a range of values for Ron and Sharon's income interest.

 

We've got the IRS valuation at 208 or $228,000.

 

Now we've got the valuation range that we use using those three life expectancy tables from 249 to 278.

 

And now we know the value, to a third party, the secondary market was paid $300,000 for the income interest.

 

So again, to go back to real estate, the income interest in a CRT is a capital asset, just like real estate.

 

So, we'll, we'll hold onto that analogy and the way that I'll explain a lot the difference in these values from the IRS to the real-world value, whether it's the range that we put on it

or what a third party would pay, it's like real estate.

 

You know, the IRS or the assessor's office will assess your house for purposes of taxation, as you probably know, if you went out and listed your house in, in the real world,

most of the time you can sell it for above the assessed value.

 

And that's similar to what we're seeing here.

 

The IRS is going to use a macro, very high-level assumptions to value your income interest.

 

Just like the county assessor is using very macro level data to assess the property, the real-world value is usually worth in some cases quite a bit more,

 

But in most cases, at least, like what we've seen here materially more than where the IRS would value it.

 

So you can see here, Ron was nice enough to give us a testimonial, you can see this

and others up on our website, crt-experts.com/testimonials.

 

Okay, so let's shift now. So, when Ron and Sharon sold their income interest for $300,000, that's cash in their pocket, what they were focused on, I think some of

that probably will end up going to the kids.

 

What they were focused on is how do we maximize our after-tax value with respect to the CRT.

 

If we have someone who doesn't.

 

So, with the next option here is the rollover.

 

What I want to go through, we'll talk about how it works, but when I go through is the very typical fact pattern, so to speak, or profile of someone for whom this would be

of interest or to whom this would be of interest.

 

So, the first thing is they probably don't need or want the taxable income that that CRT is forcing them to take.

 

We developed this rollover technique in the late 2000s, and that's what we heard a lot of,

and we still do with standard CRUT that are, we have no ability to defer income from the CRT.

 

We hear a lot, I don't want this, it's highly taxable income. I don't understand why I just can't let the trust keep it.

 

I won't pay any, I won't get anything. I won't have to pay any tax and there's more for charity, right?

 

That's not the way you can let the trust keep it, but you're still going to get K1 for it.

 

So, there's no way to avoid that CRT forcing that taxable income out.

 

We don't need or want cash for ourselves so if we have something, if we have a use for that cash, now we're going to be looking at the sale option for someone who says, I don't

want this future income from the CRT.

 

I'm not interested in any cash payment to me.

 

Now we're going to be looking at either the rollover or what we call gifting out the income interest to charity.

 

Thats what's going to help us decide between those two options is who we want to benefit.

 

We want to benefit charity that's going to be gifting out, if we want to benefit heirs,

kids, grandkids as I mentioned earlier, sometimes we'll see a spouse who wasn't on the original CRT or maybe there's a remarriage and we have a new spouse.

 

We have someone that is not on our current CRT that we're trying to drive the value of our CRT income interest to.

 

And so, with a rollover, let's say Ron and Sharon fit that profile.

 

So, they said, yeah we're done with the CRT, but we're not looking for $300,000 in cash.

We've got kids, we'd rather just steer everything toward the kids and grandkids.

 

What we can do, there is a rollover, so a rollover, we will form a new CRT and then use the value of our current income interest $300,000 here in Ron and Sharon's case to fund and monetize that CRT.

 

So, there's still a sale transaction. We still have a buyer over here, John Doe

or a buyer over here, John Doe paid Ron and Sharon $300,000.

 

They're willing to pay $300,000 to step into that future income stream from the old CRT.

 

If Ron and Sharon aren't a fit for the sale, and they contribute, create that new CRT for their kids and contribute their income interest and the old trust into that new CRT the buyer, they don't care where they're buying from, they'll pay the new CRT $300,000.

 

So, it's a very different outcome with the rollover with the sale.

 

Ron and Sharon get $300,000 in their bank account.

 

Now in a lot of cases, that $300,000 is going to make its way to the kids now or later.

 

But they want the flexibility of that $300,000 with the rollover, the $300,000 ends up in a new CRT that's going to pay the kids.

 

So, importantly because the buyers binding the income interest, instead of buying it from Ron and Sharon it's the buyer's buying from the new CRT.

 

So, there's no capital gains tax owed because the seller is the CRT, which is exempt.

 

So, it does take the tax out of the equation when we do the rollover.

 

We will very commonly just model both of these options.

 

There's more moving parts to the rollover. So typically, we need a little more size because we have to create the new CRT.

 

But they're very different options as we can see.

 

One, we've got $300,000 sitting in their bank account.

 

The other one, we've got $300,000 in a new CRT that's paying their children.

 

So, for benefits and drivers, the driver of the rollover is whoever that we're trying to benefit most.

 

Most of the time going to be children or grandchildren or a spouse who's not on the current CRT. That's the driver.

 

And then we've got these other benefits we no longer have the income stream from the old CRT.

 

We're reducing our own taxable income, and we do get a tax reduction.

 

We've created a new CRT, which will eventually pay charity.

 

So, there's usually it's about 10% of the value of what goes into that new CRT.

 

Ron and Sharon, instead of selling for $300,000 in cash, they did the rollover, they would get about a $30,000 tax deduction and their kids get to pull income off that $300,000 CRT for the rest of their lifetimes.

 

So, very different options, but we're lining them up, right?

 

What’s our objective? And then we can line it up with, with the option.

 

Now let's say that, to go back to this profile, let's go back to Ron and Sharon.

 

They don't need or want that income. They don't need or want the cash.

 

So if they want that cash, they know what they want to do with it.

 

That's the sale option.

 

That $300,000 that's in their bank account.

 

If they don't want that, but they're interested in transferring the value

of their income interest to their heirs, that's the rollover option.

 

Now, let's suppose that either they don't have kids, or they're not interested in transferring

more wealth to their kids.

 

Now we're going to be at really the last and only option for that profile, that

that fact pattern, which is what we call gifting out.

 

We're just going to gift the income interest to the charitable beneficiary.

 

So how does this work? What happens is, if I have a CRT in the, the remainder beneficiary is Children's Hospital, I will irrevocably gift my income interests to Children's Hospital.

 

That Children's Hospital now owns both interests.

 

They get all of the assets in the trust. The trust terminates, they get all the assets in the trust, and I get a tax deduction.

 

My tax deduction is equal to the IRS value of my income interest.

 

We're asked a lot; am I double dipping here?

 

I get another deduction? I took a deduction when I created the CRT.

 

No, you're not double dipping. You did take a deduction when you created the CRT,

but that was for the remainder interest.

 

What the IRS projected would eventually go to charity.

 

Here we're giving the other interest, the non-charitable the income interest to charity.

 

In Ron and Sharon's case if we go back to that IRS value there of $228,000, if they give

that income interest to the charity the charitable beneficiary gets all the assets, they would get about a $230,000 tax deduction.

 

That is, you are giving what's considered a non-cash asset to charity.

 

So, you would need to file a form, an IRS form 8283 in connection with that deduction.

Simple. It's a simple form and appraisal for any CPA who has access to software

that will calculate the value of these charitable interests.

 

Okay. So, we'll wrap up here and then talk about what we would need to review your CRT

and provide an evaluation for your situation.

 

But to recap what we've talked about, we’ll call them secondary planning options, alternatives.

 

They're alternatives to what you're doing now, letting that trust run its course that may very well after you go through the review may very well be the best fit, but there are, are these alternatives.

 

And these three alternatives are creating very different outcomes and accomplishing very

different objectives.

 

If our goal is we want the most value ourselves, we want the security and the comfort of having that cash under our personal control.

 

Maybe it'll eventually go to the kids, but we want to take that back under our, our own control. Now, that's going to be the sale option.

 

If we want to get rid of the administration, that's going to be the sale option.

 

If we're more focused on the kids, then we can potentially look at the sale.

 

If we want the flexibility of cash in terms of benefiting the children.

 

We may also look at the rollover, which instead of that $300,000 and Ron

and Sharon's example ending up in their bank account it's in a new CRT paying the children.

 

And then, if we're not interested in ourselves, we're not interested in our kids, we're left with charity, we're going to go to that gift out option.

 

We just give everything to charity.

 

We get another tax adoption.

 

Okay, to review a CRT we only need three pieces of information.

 

Nearest age or birthdate of any income beneficiary of the CRT, the payout rate of the CRT

and the approximate trust value.

 

Of course, there's no cost or obligation.

 

We believe as I mentioned earlier, our approach is describe it as, we're not trying to jam square pegs in round holes.

 

We learned a long time ago that we can't force people to be in situations where they would benefit from one of these options.

 

What we can do and what our approach is let's review the CRT and present in as clear and in a concise and unbiased manner as we can.

 

Here's what your options are. Here's what you can do with your income interest.

 

We'll attach numbers to those options and based on the feedback that we get from income beneficiaries, once you have the ability to go through, our review is always in writing,

 

It's always going to cover not only what we think we could get the quote for the income interest but also how we're paid.

 

We are paid a 3% transaction fee that's tied to the sale price, not the trust value, but we're only paid if the transaction is successfully concluded.

 

We do not charge for the review.

 

It's going to walk through how we're paid, what the fees are, how that process works.

Talk about the tax and legal authorities that we've talked about here today.

 

What gives you the ability to sell it, or what leads to that preferential that long-term capital gain tax treatment.

 

And of course, we'll value the income interests.

 

Here's what we think we could get in a sale and give you those two benchmarks like we went through for Ron and Sharon.

 

So, you can see a testimonial here.

 

This is another seller. This is Jim Butler in St. Louis. We were chatting after we completed his transaction.

 

And certainly, understandable said you pick up the phone and it's CRT experts in Leesburg, Virginia.

 

I get it. Right. As you can see through his testimony, was very pleasantly surprised about

our process and our approach.

 

We do not have a sales team.

 

Again, it's a very educational approach in terms of making sure that you understand what you own, what you can do with it, and of course what it would be worth.

 

So, I'll put my contact information up here on the screen.

 

Do not hesitate to reach out, even if you just have a general question about your CRT, I can very likely answer that for you.

 

But of course, I would really encourage you even if you're just curious.

 

But certainly, if you think that you may potentially be interested in one of these alternatives that we've talked about today please reach out, give us a call, shoot us an email.

 

Again, we only need those three pieces of information.

 

Couple days later, we'll send you a written review walking through all of what we've talked about here.

 

Like I mentioned earlier in a worst-case scenario, you've been enlightened, and you now understand a lot more about your CRT and, and what you can do with it.

But I hope this, at least just this general overview, conceptual overview has been helpful for you.

 

I really appreciate you taking some time to learn more about what your options are with respect to your CRT.

 

I hope everyone has a great rest of the day, rest of the week, and hope to hear from you sometime soon.

 

Thanks again.

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