10-24 Transcript | CRT Experts, LLC

Options for Clients with Charitable Remainder Trusts

10-24-2024

Speaker: Evan Unzelman, CEO, CRT Experts, LLC

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.

Webinar Transcript

Welcome.

My name is Evan Unzelman. I am the CEO of CRT experts.

Thank you for joining us today to talk about options for clients with charitable remainder trusts.

I’m thrilled to have you aboard. So, let's get to it.

Just at the outset, one quick housekeeping item. We are recording the webinar for all of you who are participating live, we'll make sure to get you an email tomorrow with a link where you can access and replay the webinar.

For those of you who requested a recording, thanks for requesting that and that you're watching that right now.

Before we jump in, just a brief background of the team here at CRT Experts.

Several of us here at CRT experts have spent our entire professional careers working

with charitable remainder trusts.

For me personally, in the early 2000s I was right out of school, I was tasked

with developing a secondary market for the income interest in a charitable remainder trust.

We'll talk a lot about that today.

The fact that an income interest in A CRT is a capital asset, and that's what gives clients the flexibility.

That's where I have focused my career with respect to CRTs, what we call CRT Secondary Planning.

So, working with clients, their families and their advisors who have charitable remainder trusts that are typically pretty deep into the overall life cycle of the trust 10- 20 plus years.

Helping those clients understand the options they have, what they can do with their CRT

and where there's a fit, helping them pursue those secondary planning options.

We'll talk about the three main options here today.

The sale, the rollover, and the gift of a CRT income interest.

We run the gamut of the CRT lifecycle though here at CRT experts, we work a fair amount with mainly attorneys at the front end of the CRT lifespan.

Designing CRTs and making sure that the flexibility to the donor and the duration the after-tax value of that CRT we're maxing, we're maximizing all of those from the donor standpoint.

We get involved a little bit with more complex CRT administration working with net income with makeup CRUT typically that owns an LLC or a partnership structuring the trust for

deferral.

But the main thrust of the business here at CRT experts is what we'll talk about here today.

CRT secondary planning, facilitating the sale and the rollover of income interest and charitable remainder trusts.

Whenever I'm talking on or presenting on this particular topic, I always like to start with an analogy.

If you've heard me present before, you've heard it, so bear with me but we need to make an important point.

We are talking about potentially in effect changing a CRT, exiting a CRT.

But we need to break apart what this topic today, what we do with an income interest

and a CRT that's typically been around for quite some time, and the decision to create the CRT in the first place.

This is not an anti-CRT discussion.

We'll see in a couple slides that CRTs are powerful tax planning vehicles that are put in place for good reason.

There's just this inherent combination with CRTs that can oftentimes lead to misalignments down the road in the CRT lifespan.

To make this point, I use what I call the house analogy.

When we think about buying a house or maybe building a house, we probably don't go into

that decision with the mindset that we're going to live in it forever.

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

The point is, just because we may one day sell the home doesn't mean that it was a bad decision to buy it and it didn't work well for us when we leave lived in it.

It just means that life changed such that the house didn't make sense given our current situation anymore.

And this is analogous to CRTs.

CRTs are put in place for good reasons, but most CRTs are tied to people's lifetimes.

And so, what that means is they're usually around for quite some time and over that duration because the trust is irrevocable and can't flex along with the client's changing life, that can quite naturally lead to a misalignment.

Just like with the house, that doesn't mean it was a bad decision to create the trust.

Doesn't mean that it didn't work well for the client up until now.

This just means that things change and CRTs by law are irrevocable and can't change along with the client's situation.

Just an important point that we want to make here at the outset.

So, let's talk just real briefly, pros and cons of CRTs and then we'll jump into the CRT marketplace today and why we think particularly relevant.

And then we'll go through the options, and we'll take a look at a case study to help us walk through those options.

As we all know, CRTs are predominantly put in place for tax reasons.

In most cases, a client will have an appreciated position.

They'll own appreciated property, whether it's real estate, publicly traded stock,

closely held stock that will be highly appreciated.

They want to sell that many cases, diversify that position.

They don't want to pay the tax.

They want to defer that capital gains tax.

It's not tax avoidance, of course, vehicle.

If I have a million dollars in a piece of real estate worth a million dollars on a hundred thousand dollars of basis, so I've got a $900,000 unrealized gain I want to sell that, don't want to pay the capital gains tax.

If my goal is just not to pay any tax and maximum tax deduction, I'm just going to give

that property outright to charity.

Today, whether it's my DAF Foundation, alma mater, you name it.

Then I'm not going to pay any tax at all.

If I need access to the liquidity from the sale proceeds, then I'm going to sell the property

and pay the capital gains tax.

So, the CRT is sort of a hybrid, sort of a middle ground here where I can donate the property to the CRT that can sell it without paying the tax.

So, it's accomplishing my goal upfront of I don't want to pay that big capital gain.

Now I want to defer it, and I want to diversify, sell that piece of property.

As we all know, I'm going to pay tax on those distributions from the CRT almost certainly, because of the tax treatment of CRT income at a higher rate than my capital gain rate.

So, the goal here is very much deferral of the capital gains tax.

Of course, the second of the CRT is that income stream and when we look at sort of the timing of the benefits of the CRT the tax benefits are garnered really early in the overall

life of the CRT using the first year or two.

That's when I will defer that capital gain, diversify the position, and take or at least start taking my tax deduction.

I can only carry it forward for five years.

So, from an early point in the life of the CRT, believe in the benefit with respect

to the trust is rooted in my income interest, the right to receive income from the CRT.

So powerful tax planning vehicles.

But like most things in life, there are drawbacks.

And the drawbacks with respect to a charitable remainder trust are rooted in this combination I referred to earlier of a trust that cannot change the key terms of the CRT are irrevocable, yet they're around a really long time.

They're tied most cases to a person or a couple's life joint lifetimes.

So, we look at typically 30 to 40 plus year expected durations on these CRTs.

While, as we talked about while that CR is a perfect fit at inception, when we're talking 30

40 years over that time it's almost a certainty the income beneficiaries’ situation is going to change.

But what we found is in many cases, the situation changes such that some alternative makes more sense than just waiting for the rest of life for that income stream.

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

It's not just one alternative as we'll see, the reason I alluded to this earlier is that this is a particularly relevant topic over I'd say the last 5 to 10 years.

And we think we're really sort of in a sweet spot right now in terms of the applicability

of this secondary planning.

And the reason for that is the age of this CRT marketplace of the CRTs outstanding

that are existence in the country.

You can see up here this is an analysis we did.

The IRS makes certain parts of the CRT tax return, the 5227 public record.

It's not like a foundation a public charity where I can go actually pull the tax return.

It's just disseminated through an Excel file.

And it takes a fair amount of work to actually slog through that and clean information.

But we did that most recently earlier this year.

One of the more recent things that the IRS has started releasing.

They've not done this since they started releasing this back in 2012 is they've begun releasing this is when these CRTs were created.

So that allows us to put together what you see up here on the screen and this is on the surface, pretty surprising.

The majority of CRTs out there are 20 plus years old.

We can see 58% of the CRTs were created in 2002 or before.

That on the surface might seem surprising because while we know a lot of CRTs were

created in the 90s and early 2000s a lot of those CRTs the income beneficiaries have passed or the trust have termed out if they were a term CRT.

So they're gone yet there's still most of the CRTs out there were created in the 90s and early 2000s.

Once we drill into it, it's pretty obvious why that is the case.

You know, back before ‘03 we had a higher capital gain rate and that was driving that in conjunction with the tech boom and a robust stock market.

A lot of appreciated property out there really led to this boom of CRTs at that time.

And so many more, in fact, were created during that time that there's still more out there that are from that time period that were created more recently.

So, if we think about these CRTs, we're looking at a trust that was created 20 plus years ago.

Think about the donor, the income beneficiary, create their CRTs when they were in their 50s and 60s.

Well, those individuals are in their 70s and 80s or even older now and they're in a much different situation.

In many cases, that's the difference that leads to that misalignment that we can fix through secondary planning.

Fortunately, while misalignments are common particularly the deeper we get into the CRT lifecycle.

There's good flexibility available to the clients who own these income interests.

So before we jump into the options, let's talk about why the flexibility exists in the first place.

The reason this flexibility exists is because of the way the IRS views the income interest in a CRT.

A CRT is commonly referred to as a split interest trust.

So there's two interests if we have a million dollars in a charitable remainder

trust, no one owns that a million dollars.

We have a non-charitable beneficiary that owns the right to that income stream. And then charity owns what's left in that CRT.

Used yet the last of the income beneficiaries to die or at the end of the term, if it

was structured as a term trust.

So the income interest, the non-charitable interest in that CRT is a capital asset.

And this traces back to a 1972 revenue ruling.

You can see it up here on the screen.

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

Any CRT out there that was established more than a year ago, the income beneficiary of

that CRT owns a capital asset that they can sell.

The proceeds would be long-term capital gain property.

There was a series of private letter rulings in the 2000s that looked squarely at the sellability and tax treatment of an income interest in a CRT.

So helpful in the sense that they're looking specifically at, at CRT income interest.

But when we look at those, those PLRs, all they're doing is referring back to that 1972 revenue ruling.

That's where the salability of the income interest is rooted, the ability to sell it and that preferential tax treatment, that capital gains tax treatment.

It's all rooted in that 1972 revenue ruling.

So, any client who owns an income interest in a CRT they own a capital asset, and they can do with that, what they can do with other capital assets.

They can sell it, they can contribute to a new CRT or they can give it to charity.

And those are the options we're going to talk about here today.

What, and as much as we've tried to educate this marketplace, the reality is most clients don't understand that.

They don't understand what their income interest in the CRT is.

They typically will view the CRT as a lifetime lockup, set it up, I garner my tax benefits,

now I've got the income stream.

There's nothing I can do.

So it really starts with education and just making sure the, the client understands, this is

what you own here, this is what you can do with it.

And if the client is interested in attaching numbers to those options getting in touch with us and having us run those numbers.

So let's talk about the options just conceptually first, and then we'll go through each one

of them in some detail.

And as I mentioned, we'll use a case study to guide the presentation at that point.

So the one thing that makes this relatively easy from a decision making standpoint the client, the decision making standpoint, is that the options we'll talk about today,

These three options are addressing very distinct objectives.

Once we uncover what the client's goals are we can very easily match up with the appropriate option.

And so that's what we'll talk about a lot about is the sale option.

If the client's objective is I want the most money in my pocket and I want the most after tax value, personally, we're probably going to end up with the sale option.

If the client's more focused on their heirs and the client doesn't need or want that taxable income from the CRT.

They would like to do is find a way to redirect that benefit that financial value of their income interest to children or grandchildren.

Sometimes it's a spouse that wasn't included on the original CRT.

And they want to make sure that creates an income stream for that spouse.

Then we're going to be looking at the rollover option.

If the client doesn't want the want cash themselves, they're not looking at it through ttheir pocket so to speak.

Either they have children or grandchildren and are just not interested in transferring

more wealth to children at that point.

We're really just left with the gift option which maximizes the benefit for the charity getting paid earlier.

They get the entire trust and the client a tax deduction.

And we'll talk about how that's calculated when we talk about the gift option.

So we're going to go through each of these options now and then once we wrap up here at the end we'll just sort of revisit this particular slide.

and just think about ultimately what we're trying to do is uncover the client's objective.

Once we know that client's objective, I think everyone will see at the end of the presentation.

It really is a straightforward decision.

We'll talk first about the sale.

The sale is certainly the most common.

We've been involved with thousands of sales over the last 20 plus years.

The team here at CRT Experts and this is a straightforward option.

Conceptually, it's pretty straightforward.

What the sale does is it enables the current income beneficiary of the CRT in effect,

convert their future CRT income into a cash payment.

Today a third party is purchasing the right to the future income from the CRT in exchange

for a lump sum of cash.

Importantly, this does not affect the CRT itself.

This is not a termination of a CRT.

We'll talk about that a little bit here in a couple slides.

Why clients will almost always choose to sell their income interest instead of terminate the CRT.

But it's important to note, we're just selling the income interest to a third party

in exchange for a cash payment that the third party brings from their assets to escrow at closing.

In today's environment, we're starting to see a little bit of hedging against future tax increases.

And when we think about any tax deferral vehicle, like a CRT tax deferral vehicles work great when tax rates are flat or falling.

If we could pay the same or a lower tax rate in the future, we'll pay the tax later.

The opposite, of course, is true when tax rates are rising.

If we're concerned about tax rates rising we don't want to hold tax deferral vehicles.

So another advantage in certain environments and we're seeing this a little bit, it’s not like a 2012 where we saw just a drastic increase in the capital gain rate.

But we are seeing that a little bit in today's environment.

And then for many sellers again, we think about the profile the clients who's had this for 20 years, and they're older now and a lot of these clients are just in a position now where they're just trying to simplify their financial affairs.

And that's one of the advantages of the sale.

Most CRTs are self-trustee deed.

If I'm the income beneficiary of a CRT usually I'm the trustee.

And of course, the administrative responsibility for the CRT, that annual tax return is the responsibility of the trustee.

If I sell my income interest in connection with the sale, I'm going to resign as trustee and appoint a successor trustee.

Either the buyer or one of the buyers advisors as a successor trustee.

That is going to shift the administrative responsibility onto the buyer.

Speaking of buyers, who are the buyers?

We're certainly asked this quite a bit.

First, who are not the buyers?

CRT Experts are not buyers.

Charities are not buyers.

We will talk about a termination which is a deemed sale to the remainder beneficiary.

That's not what the sale is.

We don't think that a CRT could continue to function as a CRT.

You no longer have a non-charitable beneficiary.

So the buyers who we work with the buyer pool that we've developed are all taxable

individuals and entities.

In most cases, they're tax advantaged in some way.

The original group of buyers we worked with 20 plus years ago were investment advisors who approached us.

These clients were business partners who had a taxable entity with a large net operating loss in it.

So, for all those tax folks out there, you know, if you've got an NOL a net operating loss, you need ordinary income in that entity.

They were looking for income.

We're not picky.

We're looking for any sort of tax attribute that would lead that the potential buyer to assign a higher value to the after-tax value to that same stream of income than the seller.

But some form of tax attribute is usually going to be present.

So, we the individuals with capital loss carry forwards individuals with unused charitable deductions.

Again, we're not picky.

We're just looking for that beyond the obvious characteristics, high net worth, good liquidity.

These buyers are tying up a lump sum usually for quite some period of time.

Beyond those obvious characteristics, we're looking for those tax attributes because that's what gives us the ability to arrange a sale at a price that would make sense for both sides.

When I'm asked why are clients doing this?

I have 10 or 15 CRTs within my client base what should I be looking for?

The first thing I would say is proactive.

Make sure when, as you're talking with those clients, they understand what they own

and what they can do with it, even if it's just conceptual.

But when I'm answering that question, I'll usually break the answer into two buckets.

We have what I would call the benefits and then what I would call the drivers.

And the benefits are not typically the drivers.

In terms of the benefits, it's generally going to come down to economics through the financial perspective and taxation.

So, the first is the financial end of it.

Because in most cases, we're matching up.

There's a tax differential between the buyer and the seller that gives us, as the broker of the sale, the ability to arrange the sale at a price that makes sense for both sides.

As long as we're using realistic assumptions around the duration of that income stream,

the life expectancy and investment return.

We can utilize that tax differential and match up the buyer and the seller to facilitate the sale.

For example, let's say I have a CRT and I'm paying 25% effective tax rate on the distributions.

I'm keeping 75 cents in every dollar that I get from my CRT if we can.

If CRT Experts, the broker can go find a buyer who would pay a lower effective tax rate if we had John Doe over here would pay, you know, either no tax or little tax.

He's assigning 95 to 100 cents on the dollar to the value of that income stream, there's

that tax differential that leads to the ability for the broker to arrange a sale at a price that makes sense for both parties.

This is not a driver we're not getting a big premium for the income interest.

But this does set this sale of future cash flows apart for most sales of future cash flows.

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

What we can generally demonstrate unless a client is just not paying any tax on the distributions, which would be rare, we can generally demonstrate that they're getting fair value for their CRT income interest.

The second would be taxation.

If we think about how these two options are taxed, when we're comparing that future income stream to the proceeds from the sale of the income interest, they're not the same.

For all those CPAs out there the income from a CRT is taxed differently than other types of income.

It's taxed according to section 664 the internal revenue code, which is this worst in first out,

tax treatment.

So, any ordinary income that trust earns has to be distributed out to the income beneficiaries first.

What that leads to is that in most cases someone who has a CRT is going to be paying some combination of their ordinary and capital gains tax on those distributions.

In some cases, it'll be mostly all ordinary income, just depending on how that trust is invested,

But in most cases, it's at least going to be a combination.

Now, let's think about the sale as we've been talking about.

This is a capital transaction.

We're selling a capital asset, so the proceeds are capital gain property, so we're going to pay long-term capital gains tax on the sale proceeds.

So, let's say that the future value of my income stream, I think, is worth 100,000 dollars,

and I can sell it for 100,000 dollars.

So, I'm indifferent on a pre-tax basis.

But when we tax affect these two options, I'm going to pay some combination

of ordinary capital gains tax on that future income, I get from the CRT, whereas the taxation on the sale proceeds are pure capital.

So, the after tax value is going to be greater with the sale option.

So, is that a driver? Not typically.

Of course, all the clients and their CPA, they want to make sure that this is a not a bad tax move for me to sell the income interest.

Where we do see it drive transactions are environments where the income beneficiaries

and their advisors are concerned about rising tax rates for the reason I mentioned earlier.

What does drive these transactions?

I hit on this one earlier as well, what we call simplification.

You know so many times what we hear from sellers is I'm just trying to simplify my financial affairs.

I like the idea that I can get rid of this tax return and the administrative responsibility.

In many cases, their spouse is going to take over as trustee, should they predeceased the spouse.

They don't like the idea of that.

So just the simplification.

And as I alluded to earlier, just the age of these clients who have these CRTs, now the majority of CRTs are more than 20 years old.

Most of those clients are getting into their 70s and 80s and 90s and just looking to simplify their financial affairs.

The second, which is a more, a broader, it's a wider range of clients that this would apply to, is just I'd rather have a lump sum of cash than wait the rest of my life for this income stream because of x.

And I could sit here until next week and go through examples of what X has been over the years we've seen.

But a lot of times it revolves around family.

You know, we always joke, we wish the kids always made the decision if my parents have a CRT there's no direct financial benefit to me.

They take the income, they die, everything goes to charity.

If they sell the income interest, they're retaking control of a large lump sum of cash, which

of course, they can give to me now or give to me later through, through their estate.

So as people with CRTs get older, they start to realize that, gosh, when I die, my family loses out on what's left in the trust.

Everything's got to go to charity.

The extent that I can take off the table now in cash, the future value of my CRT income, then I can give it to my kids, grandkids, whether it's now or later.

And of course, in a lot of cases it's not about the kids.

It's about the income beneficiary I want to invest it, then I'll let it pass the kids.

I want to spend some etc., etc.

I would couch all of that sort of in this broader reason of just preferring the flexibility

and the control cash under their personal control.

So how does it work?

If you go to our website and you look at the testimonial, you'll see something we hear a lot,

which is, that was a lot easier than I thought.

There's only 90,000ish CRTs out there admittedly.

So, this is a niche transaction, but not for us.

This is a big part of what we do.

And in doing this for two plus decades now, we've gotten the process down.

Our process is completely turnkey.

We provide all the documentation necessary.

Our closing team guides the process from start to finish.

Typically takes 2-4 weeks and it's concluded at Wells Fargo Bank under the supervision of an escrow agent once the client decides to proceed.

As I've been mentioning, just have us review the CRT, provide valuation for the income interest and lay these options out for the client.

They're very likely going to be enlightened.

They probably didn't know that this flexibility exists.

And then if one of these options make sense they can choose to pursue that.

In a lot of cases, it's maybe not now, it's at some point in, in the future.

Okay, so before we jump into a, a case study, just to make an important point, the sale is not is not a termination of a CRT.

very rarely do we see terminations now because of the sale option.

And we'll see why here with our case study the client is just able to get a lot more significantly more by selling than by terminating.

Any CRT can be divided actuarily between the lead and the remainder beneficiary.

The big drawback of terminating that CRT is that what the income beneficiary receives, that value is bound by the IRS value.

They cannot receive more than that or they're going to run afoul of self-dealing rules.

So, I compare this a lot in terms of the valuation because what we've seen is that same interest is going to price higher on the secondary market than what the client would receive with that IRS value.

And the comparison I make is to real estate.

You know, if we think about if my house my county assessor is going to assign a value to my home for the purposes of taxation, most likely, if I go list my house in the real world I'm going to get more than I would than that assessed value.

And it's similar here.

The IRS is assigning a value based on their interest rates and their life expectancy tables.

They're assigning a value to the income interest in most cases, just like the real world value of a house is more than the sale value or the assessed value, excuse me, the sale value of that CRT interest is going to be worth significantly more in most cases than the IRS or the termination value.

And we'll see that firsthand here when we look at this case study.

So this is a transaction we arranged earlier this year for the Shippee family.

They were kind enough to allow us to talk about this.

We rounded some numbers off to talk about their situation and use this as a way to assign values and numbers to these options that we're talking and we'll continue talking about.

So the Shippees like a lot of the individuals we work with, with CRT planning.

You've got a CRT they created in 1997 distributing 8% per year.

Like a lot of people who established CRTs in 1997 or 20 plus years ago they're just in a different situation.

Today they'd grown tired of the administrative hassles, and they were just looking to exit the trust in a way that made the most financial sense to them.

What I'm going to do is we're going to use the Shippee’s income interest to demonstrate

how we would value a CRT income interest.

And we're going to bring in some benchmarks with the IRS value as well.

So when we value a CRAT income interest, it's not a complicated valuation.

There's only three variables.

One of them is already predetermined, the payout rate of the trust, that is what it is.

The other two variables that we need to, we need to look at and make assumptions for the duration of that income stream, how long we expect that to last and the CRTs investment return over that period of time.

In terms of the duration, most CRTs are tied to people's lifetimes.

So we need to turn to the mortality tables and look at life expectancies.

If we have a term trust, a trust that will pay for a fixed term of years.

That's easy. Just how many years are left on the term.

If we have a lifetime CRT, which most CRTs are, we need to look at the mortality tables.

We'll generally look at three and you can see them up here on the screen.

The first we look at is 2010 cm.

And this is the same table that the IRS uses when creating CRTs to calculate the value of

that tax deduction.

This is the table that's required to be used.

In those cases, this is typically going to be the lowest, the shortest life expectancy

or joint life expectancy as we see here for the Shippee’s.

The second table we'll look at is the RMD table, the table that the IRS requires to be used when calculating,

Or that they use when calculating required minimum distributions from retirement accounts.

This will typically be one, two, sometimes three years longer than that 2010 cm table.

The third table and the one that will usually, sometimes it's the same as the RMD, but normally it's a year or two.

Beyond that life expectancy is the 2012 IAR table.

This table uses more recent data, and it also incorporates projective mortality improvements.

It's also based on the mortality of individuals who purchase life insurance.

They've made a bet on their longevity.

And so what that leads to in most or all cases, it's going to be the longest joint life expectancy.

And as we see here for the Shippee’s, 2010 CM has their joint life expectancy at 17 years, RMD table at 19, and the IAR table at 20.

So that duration we're going to sign, we're going to use a range 17 to 20 years is how long

we would expect this this CRT to pay out.

The next thing we need to make an assumption for is the future investment return.

What we would, what we generally do is, as long as it's not what a high payout CRT, 10 plus percent we will generally just peg it to the growth of the investment return to the CRTs payout rate so it's 5%, 6%, 7%, 8%.

Just assume it's going to earn and distribute that same amount.

Of course, that's just going to lead to a simpler analysis for the client to digest.

For the Shipee’s, we have an 8% CRT, we're just going to assume that would earn and distribute 8% annually over that 17 to 20 year life expectancy, joint life expectancy.

In their case, they had about $595,000 in the trust, 8% of that is %47,600 so that's what we've got.

That's what they own.

That's what they would be selling.

That's what a buyer would be purchasing the righ to that future income.

We've estimated that duration at 17 to 20 years,

We've just assumed a flat 8% growth rate net growth.

And we have this $47,600 dollar distribution annually.

So what is $47,000?

$47,600 a year for 17 to 20 years.

That's what we're valuing.

You can see here on the screen that that range is going to be between %434,000 using that shorter life expectancy, up to $467,000 using that IAR life expectancy.

So now we have a valuation range that we can use to compare to the sale price.

And we'll also pull in that IRS benchmark as well.

Easy we'll send a live spreadsheet.

This is obviously an easy calculation to confirm.

You can see using that NPV formula in Excel.

There are probably about 15,000 calculators online.

Here's one, money chimp.com you can see $47,600 at 8% growth.

We're using the top end of that duration, 20 years we're getting $467,342.82.

We're getting the exact same figure there.

So, what is this saying?

The right to receive $47,600 per year over the remaining lifetimes of two 75 year olds is worth about %467,000 in today's dollars.

Now we can pull in the IRS benchmark.

We're going to run the same calculation we would use if the Shippee's created the CRT today.

If they created a CRT today the IRS is going to give them a charitable tax deduction for the projected value of the charity, the remainder interest.

We can take the trust value and subtract that to get the value of the lead, the income interest.

You can see in this case, the Shippee's case with that $595,000 trust, two 75 year olds,

8% payout rate.

The value of the remainder interest was about $184,000.

If they set this up today that would've been their tax deduction.

And we can use that to arrive at the IRS value of the income interest, which you can see is about $411,000.

Now, remember this value and this IRS value because we're going to look at this later.

When we look at the gift option if the Shippee's gift their income interest to charity, their deduction is going to be equal to that figure.

The IRS value of their income interest.

This is also what they would receive if they terminated the CRT.

So, you can see here why income beneficiaries rarely terminate their CRTs.

They're going to get considerably more, just held onto the income stream.

You can see for the Shippee’s that income stream's worth $434,000 to $467,000 versus

that termination value.

Pretty much in every case that we've seen, that the income beneficiary is going to have the opportunity to get more money if they sold that income interest to a third party.

So, we take all this and we build this full valuation range using the IRS benchmark, using our present value range and the sale value.

This is going to get the client a really good feel for here's what I can do, and here's what each of these options in terms of the value would be worth to me.

So now we're going to shift to the rollover.

We're going to stick with our case study here, the Shippee’s.

Let's say that they're in a different situation than Russell and Kathy.

Let's say that they're not looking at this through their own lens.

They don't want that lump sum of cash.

They wouldn't want to pay the tax on it.

In many cases, they don't.

These clients don't want the income that the CRT is forcing them to take and pay tax on.

And once we get to that decision node, okay, the sale's not going to make sense

because they don't want that liquidity.

They don't need the income or want that taxable income from the CRT.

So, at this point, the question is simple.

Who do you want to benefit with?

You can use your CRT income interest to benefit either heirs, children, grandchildren,

we're going to be at the rollover or charity.

If the decision is kids or grandkids, or as I mentioned earlier, maybe a spouse

that wasn't on the current CRT, that's where we're going to be looking at the, at the rollover.

The impetus of the rollover.

We developed this technique in the late 2000s.

There were advisors and clients asking us can I add my kids to the CRT?

I don't want this income anymore.

Why can't I just swap my kids in?

Of course, we can't do that.

We can't, the trust terms are irrevocable.

We can't decant the charitable trust we can't do that.

At that point, we've probably done several hundred of the sale transactions.

So we knew that we can't change the CRT, but your income interest in the CRT, that's an asset that has readily value.

So, we developed this rollover technique.

Let's use the value of your existing income interest to create and monetize a new CRT

that's structured the way that you want.

Whatever change you want to make, its usually income beneficiaries putting someone else on.

Let's just reflect that change or those changes in the new CRT.

Then we will contribute our income interests irrevocably to that new CRT, which can sell it.

So, when we think about the Shippee’s, the value of their income interest, and they ended up selling their income interest for $475,000.

The buyer, whoever the buyer was of the Shippee's income interest, they don't care who they're buying.

They're willing to pay $475,000 to step into the shoes of the Shippee’s.

The shoes of the income beneficiaries.

If the Shippee's would have created a new CRT for their kids, contributed that the income interest to that new CRT, the buyer will pay the new CRT $475,000.

A key point to note here is who's the seller?

It's the new CRT.

So just like if we create a CRT with real estate, a fund, a CRT with real estate, the CRT is the seller.

So there's no capital gains tax owed.

It just fills up the capital gain tier of the CRTs accounting income.

In this case that $475,000 would've gone into this new CRT for the benefit of their children.

In fact, the Shippee’s would get a pretty small tax deduction because it's the eventual value of what that will pay to charity after their kids and grandkids will have passed.

But more importantly, they don't have to pay that capital gains tax that they would owe if they were to sell their income interest.

So let's think about the sale versus the rollover.

We've got $475,000, but it's being put to a very different use with the sale.

It's going directly to the sellers, the income beneficiaries who are selling.

They could do whatever they wanted with that.

The Shippee’s could give it to their kids if they wanted to.

So that's the sale option with the rollover.

We still have that $475,000 but that's going into a new CRT that's going to pay children, grandchildren, or anyone who's not currently an income beneficiary of the existing CRT.

So, it's much different, as we talked about earlier, different objective.

Once we know what that client's objective is, we can decide, okay, this is the option that that's going to make more sense.

Just quickly on that new CRT, and this is well beyond the scope of this discussion, but if you're interested we did a webinar on how to structure not only the rollover CRT, but just CRTs in general with multi-generations.

If we have a CRT, what we want to do, the way that we at CRT Experts look at CRT design is

through the lens of the taxpayer.

Not the charity, we want to maximize the value to the donor and their family.

What that means is give them as much flexibility as we can, which often means give them the ability to regulate the income stream, defer income, usually in the early generations, the early life of that CRT.

And then we want to maximize the duration.

We want to include as many family members as we can.

So, in many cases, we're going to use what's commonly referred to as a life plus term CRT.

It's going to go for the kid in some cases, the parents and the kids, some cases the kids lifetimes and then for a fixed term to the grandkids.

So, if you're interested, shoot me an email.

I'll send you the slide deck on it.

We've got a recording of the webinar if you're interested at the other end of the CRT spectrum, right?

The very beginning, the CRT design the upfront design of CRTs.

Okay, now let's look at the last option and we can wrap up here.

Gift out, now let's go back to the Shippee’s.

In our profile, our client profile.

We're not a fit for the sale.

They don't want in most cases, I don't know what I do with the money.

I don't want to pay the capital gains.

So now, do you have kids or grandkids or anyone else who you'd rather benefit with the trust?

No, either I don't have kids or grandkids, or I'm not interested in transferring more wealth to them.

Now we're at the last remaining option, which is what we often call gifting out.

Because we're exiting the CRT, but we're just going to gift everything to charity.

So from a technical standpoint, what Russell and Cathy Shippee would've done is they would've irrevocably contributed their income interests to the charitable remainderman.

It'll qualify for a charitable tax deduction for them, and it will just give all the assets to charity.

So, remember we bookmarked earlier that IRS value, right?

We can just quickly go back to that IRS value $411,000.

That's the value of the Shippee's income interest.

If they give that to charity, they could take a tax deduction for $411,192 and 60 cents.

We're asked quite a bit. Well, is that double dipping?

I got a deduction when I created my CRT.

Well, no, because when you created your CRT, your deduction was based on the remainder value, what the IRS projected would eventually go to charity.

We're now looking at the other value, the income interest, the non-charitable interest, which you're giving to charity.

That would qualify for a charitable tax deduction.

Even if the CRT is fully cash, you still need an 8283 for that.

This is the income interest in the CRT, whether it's all cash or not, it is a non-cash asset.

So, you're going to need to file that form 8283 and get a qualified appraiser to sign off on it.

Any qualified appraiser has access to software that will calculate the same calculation we saw on that prior screen.

It's not a difficult calculation.

You just need to find a qualified appraiser.

If you can't shoot me an email, we can certainly refer you to one.

But to value what that income interest is worth, what the IRS value is,

because that's what the client is giving to charity.

To go back to our, our diagram or illustrations, now, let's pull this third one in the gift option.

So, we have the sale option, $475,000 to the seller. Simple.

They do whatever they want with it.

It's under their, their personal control. With the rollover.

They're using the value of their income interest $475,000 to create a new CRT with different terms usually different income beneficiaries oftentimes kids and grandkids.

And then the third option here, these first two options aren't a fit.

Okay, let's give that income interest to charity.

We get a $411,000 tax deduction which to most high bracket payers is probably worth

than $150,000 range.

So, very different outcomes, distinct outcomes, as I mentioned earlier.

But once the client's objective isn't uncovered, it's simply a matter of matching up the objective with the outcome.

If we have a sale, the objective is going to be maximum value to the client.

If they're more focused on heirs, we're going to be looking at the rollover, most likely charity.

We're going to be looking at gifting the income interest to the remainder beneficiary.

So hopefully this has been a educational and enlightening discussion or presentation for everyone.

Again, I want to encourage you as you're discussing or you're meeting with a client who has a CRT, whether it's a quarterly or just an upcoming, just a normal trust

and estate review, something like that.

Reach out to us.

I'll put my contact information on the next slide.

But you can see our information here.

We only need the information you see up on the screen the nearest age or birth dates of any income beneficiaries, the payout rate of the trust, the approximate trust value.

You give us that information in a couple days, we'll send you a review.

It's going to walk through all of these options.

Sometimes you'll, you know, the advisors will say, let's just look at the sale.

Let's just look at the rollover.

We'll walk through these options, attach numbers to the options evaluations, to the options and enable you to sit down with the client and have a very informed discussion about and enlightening for the client in terms of here's what you own, here's what you can do with it.

And here's what the numbers look like.

Worst case, the client says, Hey, this is good to know.

I'll keep this in mind, but let's just stay the course.

No problem. They've been in, they've been informed.

Worst case scenario. But in many cases, what we've found particularly with these older CRTs, is the client is oftentimes going to say that one makes, makes sense.

It's sort of bringing their CRT journey, so to speak, to a satisfactory conclusion.

Great tax move to set it up, worked really well, and now we can bring that to a successful conclusion.

So again, my contact information on the is on the screen.

Just general CRT questions, not just about what we've talked about today, just general CRT questions.

We probably have the answer if we don't, we'll get the answer, but we probably have the answer.

So happy to just kick around a situation where maybe a client is creating a CRT

or we've got an existing CRT, maybe with some administrative questions.

And of course, anything secondary planning related happy to run the numbers on as well.

Again, thank you.

We had great turnout, both recording requests and live participants.

Really happy about that.

Thank you so much for joining us today.

I hope everyone has a great rest of your day, week and hopefully we'll hear from you sometime soon.

Thanks again.