10-30 Transcript | CRT Experts, LLC

Options for CRT Beneficiaries

10-30-24

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.

And thank you for joining us today to discuss options for income beneficiaries of charitable remainder trusts.

We are recording the webinar for all of our live participants.

We will send you a link tomorrow where you can watch a replay of the webinar if you so desire.

For everyone who requested a recording of the webinar you're watching that now. Thank you for your request.

And thank you everyone for joining us.

Just here at the outset a brief background on CRT Experts.

The team here for several of us we have spent our entire professional lives working with charitable remainder trusts.

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

As we'll talk quite a bit about today the income interest in a charitable remainder trust

that right to receive income from the trust is viewed or considered by the IRS to be a capital asset.

And so that gives the income interest holder for those of you who are watching the webinar here today good flexibility with respect to their income interest.

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

There's a non-charitable interest, the income interest and then there's what the charity owns what's left in that trust usually at the end of the lives the income beneficiaries.

And while the trust itself is irrevocable, the income interest is a capital asset.

And so you can do with that capital asset what you can do with, with any of your capital assets, whether it's real estate, publicly traded stock, closely held stock in a business, you can buy and sell it.

You can use that to create a new CRT for loved ones, or you can give it to charity.

And those are the options that we'll talk about here today.

I oversaw my first sale transaction.

The sale of the income interest in 2003 and have overseen thousands since then.

And that's where we spend most of our time here at CRT Experts is working with income beneficiaries of existing CRTs that are already in place sometimes for quite some time,

and helping them number one understand what they own and what they can do with it.

But then of course, if they're interested in pursuing one of these options we're happy to help.

But we do run the gamut.

In terms of the CRT lifecycle and our service offering here at CRT Experts, we work a fair amount with trust and estate attorneys at the beginning of the CRT lifespan,

Creating and designing CRTs really with an eye toward maximizing the taxpayer's value, the donor's value.

We get involved to some extent in administering CRTs, particularly more complex structures.

Types of CRTs are net income with makeup, CRUT, NIMCRUTs if you're familiar.

But the specialty has and will always be what we're going to talk about here today which is secondary planning for people who have established CRTs and helping them understand what they can do with those income streams.

We're based here in Leesburg, Virginia.

If any of you have been in and out of Dulles Airport just outside of Washington you've been within a stones throw of us here in Leesburg.

I'm a west coaster originally I was born and raised in the West Coast.

So the history back here in the eastern seaboard just never ceases to amaze me.

Our building up here, which we were lucky enough to purchase not too long ago, was built in 1825.

So, pretty cool. If you're ever in Leesburg, Virginia stop on by.

We'll be happy to show you around.

Okay, so whenever I'm presenting on this particular topic we're going to be talking today about potentially exiting a CRT in effect changing a CRT with the rollover strategy.

And we need to, at the outset here, make an important point that this is anything but an anti-CRT discussion.

We'll talk about this here in the next few slides.

There's just this inherent combination in a CRT that oftentimes can meet or lead to a misalignment between our situations today and the irrevocable terms of this trust that we established some time ago.

So we need to break apart those decisions.

None of what we'll talk about here today means it was a mistake to create the CRT and to drive that point.

I use what I call the house analogy.

So, 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 making process with the mindset that we're necessarily going to live in that house forever.

There's a lot of things in our lives that would lead us to sell the house from kids growing up and moving out.

We want to downsize.

We want to move to a warmer weather state, a lower tax state, health changes, family changes, divorce, remarriage, death of a spouse, remarriage, etc.

But the point is, just because we someday sell the house doesn't mean it was a bad decision to buy it and that it didn't serve us very well when we lived in it.

It just means that life changed and our house couldn't change along with our changing lives.

And that's analogous we think to a CRT.

CRTs we'll talk about on the next slide, why these are created.

But these are put in place for good reasons.

These are good tax planning vehicles.

But there's this combination of an irrevocable trust and a really long duration on the lifespan of that trust that can quite naturally lead to misalignments.

And we need to make the point here at the outset that just because we one day potentially exit the CRT does not mean that it was a bad decision to create it and it didn't work very well for us for quite some time.

I just want to make that point here at the outset.

So, let's just hit before we get to the flexibility and the options just kind of reset the discussion to speak and think about when we created our CRTs.

For all of you who are on this webinar watching the replay you probably created your CRT for tax reasons.

CRTs are our powerful tax planning vehicles.

The primary goal of creating the CRT in most cases is to defer capital gain.

Usually, we have a capital asset that's going into the trust, appreciated real estate or stock and we want to sell that asset, diversify that position, but we don't want to pay all that capital gains tax.

Now, and CRT can be a good vehicle in that situation.

If we're looking for max value to charity or maximum tax deduction, we're going to give

that asset outright to charity.

If we're looking for what we need, the liquidity from the sale of the asset we're just going to sell the asset and pay the tax.

So, the CRT is a good hybrid, sort of a middle ground between those two extremes, where we can donate that property to an exempt trust, the CRT which can sell it without paying the tax, and we can defer that tax into the future while diversifying that position today.

This is not a tax avoidance vehicle.

Of course, we're going to pay tax in that income stream, almost certainly at a higher rate than the rate that we would've paid up front on the capital gain rate.

But our desire is to defer that tax into the future.

So, when we look at the timing of these benefits, one thing that's always true is that the tax advantages and really the driver behind creating the CRT they're garnered very early in the life of the CRT.

That's when we donate that asset to the CRT.

The CRT sells it.

That's when we diversify that position, defer the capital gain, we take our tax deduction or start taking it.

But the most we can carry that forward is five years.

From a relatively early stage point in the life of that CRT, our value with respect to that trust, the CRT is rooted in that future income stream what's commonly referred to

as the income interest in the CRT.

So good tax planning vehicles.

But like most things in life, there's drawbacks.

The main drawback, and I've already alluded to it a couple times already is this

combination of the CRT is an irrevocable trust.

We cannot change the key terms payout rate, who the income beneficiaries are, the type of CRT.

There's different types of CRTs, unitrust and annuity trusts and net income trusts.

We can't change any of that.

But the CRT in most cases is tied to our lifetimes.

So, it's going to be around for a really long time 20, 30, 40 plus years in most cases.

That combination, while the trust is a great fit at its inception, when we create it

as our life starts to change, I mean, if there's one constant, it's change, right?

It was a perfect fit when we set it up.

But as our life starts to change, that trust can't flex along with our changing life like most

of our planning can, whether it's our investment planning, our financial advisors are tweaking those portfolios over time as we grow older, our insurance planning, our trust and estate planning.

But this trust can't change.

It's irrevocable.

So that can quite naturally lead to a misalignment between the situation we're in right now

and the terms of the CRT that we created so long ago.

Fortunately, there's good flexibility and optionality available to you as the income interest holder.

And I certainly understand I'm not speaking to tax attorneys.

But I always go over the legal and tax authorities for this before jumping into the options.

Because it's really straightforward.

The income interest in a trust, we talked earlier, a CRT is a split interest trust.

You know, if I have a million dollars in a CRT, no one party owns that million dollars.

I own the right to receive income.

Charity owns what's left at the end of my life or joint lives with the spouse.

So it's a split interest trust, my interest, the income interest is a capital asset.

And that traces back to a 1972 revenue ruling, which you can see up here on the screen.

And what that revenue ruling says is that in income interest, the life interest in a trust,

not just a CRT in any type of a trust is a capital asset.

So anyone who has established a CRT more than a year ago, what you own is an income.

That income interest is a capital asset that can be sold, and the sale proceeds would be capital gain property.

So that 1972 revenue ruling is where the flexibility to sell the income interest.

The salability is rooted in that preferential tax treatment, that capital gains tax treatment.

We'll talk about why that is preferential here in a little bit.

Because we're going to compare that to the type of tax that the income beneficiary pays on the income stream.

There were some private letter rulings

or PLRs as they're commonly called in the 2000s.

And those look squarely at the income interest in a charitable remainder trust.

But all they did is refer back to the 1972 revenue rule.

So helpful because they're looking right at the income interest in a CRT.

They're confirming that the salability and tax treatment, but everything from a tax

and legal standpoint goes back to this 1972 revenue ruling.

So, the fact that it's a capital asset gives us as the income beneficiary of a CRT good flexibility.

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

We can buy and sell it the sale option, which is the most common of the options that we'll talk about.

We can contribute that income interest to a new CRT.

Usually for children, grandchildren, maybe a spouse that wasn't on our current CRT and or it can be given to charity.

So, we're going to talk about those three options.

We're going to start with the sale option, which is as I mentioned, the most common of these three options,

What makes our job easy and the decision making process easy from the income

beneficiary standpoint, is we talk about the flexibility, that you have the alternatives, right?

These are all alternatives to what we call no action which is just keep waiting for that income, wait the rest of your life for that income stream.

These are alternatives and what makes our job pretty easy with respect to the decision, does one of these alternatives make sense or not?

Each of these options really have very different distinct outcome.

So as long as we understand what the goal is and if I want as much after-tax value as possible.

If the goal is, I'm at the point where I'm trying to shift everything the value of my income interest and my CRT to heirs to kids and grandkids.

So, my goal at this point is children and grandchildren.

We're going to look at the rollover option.

If my goal is purely charity, we're going to look at the gift option.

And so it will also be evident why by the end of this discussion.

Why the sale option is most common.

It's going to appeal to the widest range of people.

And as we'll talk about if the goal is kids and grandkids, sometimes the sale is a better fit than the rollover.

It just depends on how you want to go about benefiting those heirs.

So, let's get to it. Let's talk about the sale first.

The sale of an income interest by selling, in effect what you're doing is converting that future CRT income stream into a cash payment today.

Importantly, the trust itself has not affected, a third party buyer is paying you cash for the right to step into your shoes as the income beneficiary of the CRT.

The income stream remains tied to your lifetime.

It still pays charity upon your death, but a third party buyer is now receiving that income in exchange for the cash that they paid you at closing.

Also importantly, there is a shift of the administrative responsibilities to the buyer.

And this is very common.

I'll talk about this in the next slide, in terms of why people or key factors in why they end up selling their income interest to get rid of that administrative hassle and cost, what we call the simplification benefit.

I'm at this point where I'm trying to simplify my financial fair affairs and tired of dealing with that 5227.

That CRT tax return every year.

If I sell my income interest, most income beneficiaries are the trustees of their CRT.

So, if you're listening to this or watching this and you have an income interest, you're probably the trustee.

That's what's called a self-trustee trust.

And that's what we would recommend in most cases when it comes to CRTs, the trusteeship, that's where the administrative responsibilities are tied.

If I'm the trustee of my CRT and I sell my income interest, I'm going to resign as trustee, and I'm going to appoint either the buyer or one of their advisors at this as the successor trustee.

And that change of trustee is tied to the closing.

What that does is it shifts all of the future responsibilities with respect to the trust,

including the 2024 tax return onto the buyer of the income interest.

So speaking of buyers, who are the buyers?

We're asked this a lot of course, who are not the buyers?

We are not, CRT Experts is not a buyer.

Charities are not buyers.

Can a charity buy the income interest from a CRT?

Now you would no longer have a non-charitable beneficiary there, so it's, it would no longer qualify.

So, all of the buyers we work with are taxable.

They're going to be taxable individuals or taxable entities, business partners, groups, families, etc.

But they're all taxable.

As we've developed the buyer pool, we've looked for beyond the obvious.

Obviously, if I'm a buyer of an income interest, I'm tying up a lump sum, usually

for quite some period of time.

So, there's the obvious characteristics of high net worth and good liquidity.

But what we've looked for and what drives these transactions, in most cases, what we've looked for is buyers who while taxable are tax advantaged in some ways.

For example, the initial group of buyers we've worked with now 20 plus years ago, they were business partners who had a taxable entity with a very large, like $10 or $15 million net operating loss in it.

If you're familiar with NOLs, as they call them, net operating losses, you know that you need income or the entity that has that loss needs income.

So their investment advisors, were looking for different sources of income streams.

And that continues to be an NOL inside of an entity continues to be a common, uh, characteristic from a buyer standpoint today.

But we're not picky.

We're going to look for any tax attribute.

It may be an individual with unused charitable deductions, an individual with capital loss carry forwards.

We're just looking for something that would put that potential buyer in a position where they're going to pay a lower effective tax rate on that income stream than the seller.

Because that's what gives us the ability to arrange a sale.

When we're talking to income beneficiaries of CRTs or their advisors, one thing that we can say upfront is most likely you will have the opportunity to sell the income stream at the full value of keeping, and often even a little bit more.

And the reason for that is you're going to be selling it to someone who's going to be paying a lower effective tax rate, potentially no tax at all on that income.

So, if I have a CRT, and let's say I'm paying 20% pretty low effective tax rate on my distribution.

I'm keeping 80 cents on every dollar I get from that CRT, if the broker, CRT Experts can find a buyer who's going to keep 95 or 100 cents, it's going to be worth more to that buyer.

All else equal for using similar mortality tables and investment return administrative costs.

We'll talk about that in a few slides in terms of that valuation.

But all else equal, that buyer's going to put a higher valuation on that stream, same stream of income.

Because they're not paying the same tax rate.

So what we've discovered and learned and had good success at is we can, we can find a buyer and a seller because of that tax differential, just put different valuations on that same stream of income, and it gives us the ability to broker the sale at a price that would make sense for both sides.

Now, this is not what I would call a driver of the sale transaction.

People aren't selling their income streams because they're getting this big financial premium.

But, it's an important consideration.

Am I getting fair value from a financial standpoint?

And it also sets this sale apart from most sales of future cash flows.

In most cases, if I own a stream of future income and I want to monetize that, I want to sell that for cash today to a third party, I'm going to be forced to take a discount in exchange for the up for the upfront liquidity.

That's not typically, unless you're just not paying tax on your CRT income, which is rare

that's not going to be the case here.

Most likely you can sell it at even a little bit above the, the value of keeping that income interest.

So not a driver typically, but important consideration, of course, taxation is another, what I would call a benefit, but not usually a driver.

Now in this environment where some people are concerned about rising tax rates, about tax rates being higher in the future, it does for many tax sensitive individuals become a driver.

So, when we think about a CRT as a tax deferral vehicle, it's deferring income into the future.

It's pushing my income into the future, and I'm going to pay tax on that income at future tax rates.

Well, that works great if tax rates are flat or falling.

If I can pay the same tax in the future or a lower tax in the future, I'd rather do that of course.

But when tax rates are rising, the opposite is true.

I'd rather pay tax now at the current tax rates than pay that tax in the future at higher tax rates.

Setting that aside though, let's assume tax rates are always going to be the same, probably not, but assume that and let's just say that my income interest is

worth a hundred thousand dollars.

So, I run the numbers and we'll go through an example but I think that keeping my income

and waiting for the rest of my life for that income stream is worth a hundred thousand dollars.

Now, let's say John Doe over here a potential buyer is willing to pay me a hundred thousand dollars for that income stream.

So, I'm indifferent on a pre-tax basis, a hundred thousand of income, a hundred thousand of sale proceeds.

But if we tax affect those two options and look at this on an after-tax basis they're anything but equal.

So, the income that we get from our CRTs as many of you probably know there it's the CRT income is taxed differently than other types of income.

It's run through a four-tier accounting structure that taxes that income on a worst end first out basis.

So, any ordinary income that trust earns has to be paid out first, then cap gain, then exempt and corpus.

So, the long and short of those rules are most people are paying tax on their CRT income at some combination of their ordinary and capital gains rates.

Some of that income's ordinary, some of it’s capital gain.

In some cases, it might be mostly or all ordinary, but in most cases it's going to be a combination.

Now, let's think about the sale.

At worst I'm going to pay long-term capital gains tax on the sale proceeds.

So, what would I rather have a hundred thousand dollars right now at the current capital gain rate or a hundred thousand dollars over my remaining lifetime at some combination of the prevailing at that time, ordinary capital gains rates?

And so when we tax effect those options, uh, the sale is, again, unless you're just not paying tax on your CRT income, the sale's going to come out, come out ahead.

So those are of course, important taxation and economics, right?

We always want to look at any transaction through those lenses.

But what drives transactions doesn't tend to be those, those things.

What drives transactions, it tends to be much more case or person family specific.

But there's generally two kinds of overarching drivers.

The first I've hit on it already is just what we call simplification.

I'm just trying to simplify my financial affairs tired of that CRT administration.

In some cases, a spouse is going to take over that trusteeship.

Should I pre-deceased my spouse.

And I don't like the idea of that.

And it's just this desire for simplicity as we grow older.

We hear that all of all of the time.

The second is a broader reason, but we'll put some context on it.

And that is just, I'd rather have this cash right now than wait the rest of my life for that income.

Now I could sit here until next week and talk about the reasons we've heard from sellers in terms of why they would rather have that cash.

Now it'll range from everything from I just prefer assets under my control.

The comfort, the flexibility of that.

But in many cases, it's driven by family.

You know, we always joke, if the kids always made the decision we would do a lot more transactions.

If my parents have a CRT, there's no benefit directly to me.

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

If they sell their income interest though, and retake control of those assets, and I'm part of their planning that's going to benefit me.

So as people get older, they sort of begin to realize, and this has been true since we created the trust, but start to realize comes a little more clear in terms of gosh when I die my family loses control, they lose out on these assets.

Everything has to go to charity.

So, the sale gives me the ability to take off the table now in cash, the value of that future income stream.

So oftentimes it will revolve around family.

And that could be now it could be later, in a lot of cases it's just I'm going to spend some of it, invest it and give the rest to the kids through the estate.

So, lots of different reasons, but that's what it comes down, is just the flexibility

and the comfort of that cash.

And as I mentioned, just a few minutes ago, just it's described a lot as a hedge on that political and tax uncertainty as tax rates go up, to the extent that they do go up, obviously it's going to be in my best interest to lock in the current capital gain rate on that future income.

So, how does it work?

It all starts, I'll talk later about what we need to do, the review and just the importance of the review.

But it really is where it starts.

You know, we really, and I'll talk about this later too, we really do pride ourselves on having an educational approach.

I call it no square pegs and round holes.

You know what we want to do and it's a never-ending quest.

It'll never happen.

But what we would love is for every income beneficiary in the country, there are about 90,000 of these CRTs out there for every income beneficiary to understand what they can do.

If everyone understands what they can do, where it fits.

But we're obviously not there.

So what we always encourage initially is just to have your CRT reviewed.

We don't charge, we don't require documentation, just have your CRT reviewed.

We will let you know, hey, here's what we think we can get for it.

We'll go through some benchmarks; we'll talk about those here on the next few slides.

Go through the tax and legal, go through how we're paid, and you will have an understanding of what your options are.

So that's where it always starts.

But if after going through that review or two, three reviews later, we make the decision, okay yeah, this makes sense to proceed.

The process, I always say and we hear this all the time, if you go to our website

and look at testimonials, you'll see this as certainly a common thread is this is a

lot easier than I thought.

And certainly admittedly, I mean, upfront, this would seem like this is a niche transaction, right?

There's only 90,000 of these out there.

But for us, it's all we do.

And we've been doing it a long time, and we've done a lot of them.

And over that time, we've developed a process that really is easy and straightforward for the seller.

Our closing team is going to guide the process from beginning to end.

It's typically a two-to-four-week process.

It's turnkey in the sense that we're going to provide all the documentation necessary and it closes, the transactions concluded via an escrow process at Wells Fargo Bank under the supervision of an escrow agent at closing.

Seller receives cash, the income interest is transferred to the buyer along with that trusteeship which also transfers all that future administrative responsibility.

Certainly an easier process than most would think up upfront.

So, just something to bear in mind if you're at the point where you're deciding this makes sense, but is this complicated?

It's much less complicated than you would probably think.

Okay, what I want to do is use an actual transaction that we did here recently for the Bump

family and use that to go through the valuation process how the income interest is valued.

We'll look at some benchmarks and we'll use an actual transaction to do that.

We've rounded the numbers off.

This is an actual seller.

We'll talk about this in a little bit.

Someone that you can talk to if you were interested in talking with Ron.

This is Ronald and Sharon Bump.

They are Minneapolis, Minnesota residents.

They had created a CRT in the 1990s paying them 7%.

Like many people created a CRT in the 1990s.

They're just in a different position now, and their planning goals have changed,

and they've grown tired of the administration.

But really it was just sort of this as they described it in so many people do the trust had run its course.

And so they had us initially review the CRT along with their financial advisor and they ended up completing the sale transaction here recently.

So let's go through their, using their trust to talk about the valuation of a CRT income interest when we value a CRT interest.

It's not a complicated analysis.

There's only three variables.

One of them is already determined.

The payout rate of the CRT, in the bumps case, was 7%.

Pretty common payout rate, that is what it is.

We need to assign assumptions to other variables, though.

The first is the duration of the income stream.

Most income streams from CRTs are tied to lifetime.

So we're going to look at mortality tables to look at life expectancies here.

And then investment return.

If the trust is paying 7%, what do we expect that trust to earn moving forward?

So, we'll talk about duration first and then return.

And then we'll look at how the numbers worked out for the Bump family.

So, again, when we look at duration, we're looking in most cases, unless you have a term of years trust.

Then that's easy, right?

If the maximum term is 20 years,

I set up a 20-year term 10 years ago.

There's 10 years of payments left that's our duration, 10 years.

But in most cases, these are tied not to a term of years, but to people's lifetime.

So, we need to look at mortality tables.

We will look at three different tables which in all cases, it's going to put a range on

that valuation depending on which table we're using, which duration.

That's going to dictate a different value for the income interest.

First table we'll look at is IRS table 2010 cm.

So, this is the same table that anyone uses when they create a create a CRT to calculate that charitable deduction.

The IRS is going to use their own interest rate and mortality table to determine this is what we think on a present value basis is going to go to charity.

That's what your tax deduction is.

That same calculation will tell you the value of the income interest as well.

This is usually the shortest of these three life expectancies, these three mortality tables.

The second one we'll look at is the same table that's used when calculating required minimum distribution.

RMDs they're commonly called from retirement plans.

So, if you have a retirement plan and you're of the age, I'm sure you're very familiar with RMDs.

That's another IRS table mortality table.

But it generally is going to have a little bit longer life expectancy or joint life expectancy than the 2010 cm table.

And then the third, which is in most cases going to be the most aggressive or longest life expectancy is the 2012 IAR table.

This is a table that's derived for more recent data for one, but two it also incorporates mortality improvements into the calculation of life expectancy.

It's also based on the mortality of people who purchase insurance, people

who are making it bet on their longevity.

So, in all cases, this is either going to be tied with the RMD table, or most cases a year

or two longer than that table and usually two to three years longer than the 2010 CM table.

So, as you see for Ronald here and Sharon 85 and 82 years old their life expectancy per the first table was 11 years.

The second table is 12 years.

The IAR, that third table is 13 years.

So, the expected duration, how long we think this income stream will pay out it ranges from 11 to 13 years.

And of course, the value of that income stream at 13 years is going to be higher than 12

and 12 and higher than 11.

So that leads to that valuation range, and we'll see what that is here.

Momentarily investment return first this is just a benchmark we're using to assess the sales.

So, use expected or better than expected assumptions when we're estimating this here.

But as long as a CRT has 9% or lower of a payout rate what we would recommend is just set the investment return equal to the payout rate makes for a much simpler analysis.

And that's where most CRTs payout rates are.

5%, 6%, 7%, 8%, 9%, somewhere in that range.

So, we'll just peg that investment return assumption to that payout rate in the Bumps case 7% Unitrust payout rate.

So, we just assume it's going to earn that 7% net of any fees.

That leads to a steady stream of income.

In their case they had $475,000 in that trust.

So, it's just 7% of that $475,000.

And that's going to be consistent because we're assuming it's earning

and distributing that same amount each year that $33,250 per year.

That leads to, like I said a simple, much simpler analysis then we can vary the investment rate we'll put it at 20%, if that's what I mean, it's your value and not ours.

But, in most cases, it's a pretty simple calculation in terms of what those expected cash flows are.

We've already seen that; we expect Ron and Sharon to live 11 to 13 years and we're just going to assume that it's earning and distributing $33,250 a year.

And that's what enables us to come up with this valuation range between about $249,200 $78,000 just depending on what mortality table that we're using to estimate the duration.

This, as you can tell from looking at it, just an Excel calculation anyone who has access to Excel can quickly confirm it.

We'll send you a live spreadsheet if you want but there's also probably 15,000 calculators online that will run this calculation.

Here's one from money chimp.com.

We just plug in this case that $33, 250 a year where we assume it earns 7%, we're going to use the top end of that range, the 13 years on that 11-to-13-year range.

And you can see that's giving us an identical value to what we got out of Excel

and what we see here on our cashflow analysis.

So that is the one benchmark, and this is going to be the most realistic benchmark or what we'd recommend using.

Because when we look at this next benchmark it's almost always going to be lower than even the bottom end of that valuation range.

But nevertheless, the IRS does give us a benchmark.

And we will provide that as well.

So, mentioned earlier, anytime you set up a CRT, there's the IRS is calculating the value of the income interest, the remainder interest.

So, we pull up crescendo and easy charitable, two different versions of software to calculate these values.

And we can very quickly determine what the IRS value of the income interest.

You can see in Ron and Sharon's case that IRS value is about $228,000.

And as we've seen, that's going to be a little bit lower than even the bottom end of this range to $278,000 that we saw.

Okay, so that's another benchmark to compare to the sale price.

So now we can come back and just bookmark that $228,000.

That's the IRS value because we're going to need that again when we talk about gifting the income interest.

But that's the IRS value of that income interest almost always going to be lower.

I compare this a lot to real estate.

If we look at the assessment value my county government the assessor's office is going to put a value on my property for purposes of taxation.

I can almost always go list that in the real world and sell it for more than that.

And, that's going to be the case here.

But nevertheless another benchmark.

So what that has enabled us to do here is it enables us put a range on the value of the Bumps income interest from the bottom end of the IRS value to that present value range using those three life expectancies which should have been updated here.

This is a different analysis.

This is actually 11, 12, and 13 years.

We saw the 249,000, 264,000, 278,000.

That valuation range allows us to put in context what that income interest would sell for.

And that was, as you saw $300,000.

So, we've compared how the sale price to the IRS value, the present value.

And as is very often the case that income interest is saleable at even a little bit above, as you see in the case for, for the Bump family.

The value of keeping that income interest is a very average, I guess I would call it example,

very typical of the valuation of that income stream and how that would compare to the sale.

You could see this on the website Ron was nice enough to give us a testimonial.

And he also was nice enough to be willing to speak with other potential sellers.

I always tell once you go through the review and you reach a decision that hey I'd like

to move forward with this, but I'd like to hear it from someone else's perspective, someone who's gone through this process.

We will connect you with as many prior sellers as you're interested in talking to.

After going through this process, most are quite willing to speak with other people

who are interested in just looking for someone's perspective other than CRT Experts.

Okay, so now we're going to shift to the rollover.

And when we think about Ron and Sharon's case, their goal was and they have kids on sounds like a fair amount of this will, the sale proceeds will end up going to kids.

So certainly with the sale, there is that family component in many cases.

But if the sole goal is the heirs as children and grandchildren then we're probably not going to be looking at the sale.

We're going to start looking at the rollover.

So when we think about the fact pattern here in terms of the typical client profile, one you no longer need or want, that the income that the CRT is forcing you to take.

This is something when we developed the rollover in the mid to late 2000s, something we were hearing a lot from people was I don't need this income.

The trust forces me to take it.

I'm paying a high tax rate on it.

Isn't there a way just to put my kids on and let them have it?

We can't do that because the trust is irrevocable.

However, at that time, we knew that we'd probably done a few hundred

of these sale transactions at that point.

So, we knew that, well, we can't just add your kids to this trust, we can't change the income beneficiaries, but we do know that your income interest is a capital asset that has value.

And so, we can use that capital asset to create a new CRT with whatever changes you want to make, usually adding new beneficiaries we can make the new CRT that's a ground up build.

We can design that however you want and then we can use that income interest in your current CRT to monetize that new CRT to fund and monetize it.

So in Ron and Sharon's case, we saw that they were able to sell their income interest for $300,000.

Instead of that $300,000, that's the sale option.

Instead of that $300,000 going into their pocket, that $300,000 goes into a new CRT that pays their children.

Now, importantly, if Ron and Sharon take the 300,000 personally that money goes into their bank account.

That's the sale option.

There are no taxes taken out at sale, but they're going to get a 1099 the year following the sale to report that capital gain on their tax return.

And we have talked about that capital gain tax treatment of the sale proceeds is better than that CRT income but it's still a capital transaction.

So with the rollover prior to that sale, Ron and Sharon would have created that new CRT contributed the income interest to the new CRT and that new CRT is the seller.

So just like when we create a CRT and we give another capital asset real estate to that CRT sells it and the CRT is exempt.

So Ron and Sharon do not have any, tax responsibility with the rollover.

In fact, they're going to get a charitable deduction for what the IRS projects will go to charity from that new CRT usually pretty small because we're adding pretty young income beneficiaries in most cases with the kids and grandkids.

But more importantly there's no tax liability.

There is a sale, but the sale proceeds are paid to the new CRT.

So if we have John Doe here who's willing to pay Ronald and Sharon $300,000 for their income interest if they do the rollover and contribute the income interest to this new CRT.

John Doe doesn't care who he's buying the income interest from.

So, he would pay Ron and Sharon $300,000 he'll pay this new CRT $300,000 and now they've got this new asset that's producing income for their heirs.

You can see here very different outcomes when we look at the sale versus the rollover.

And we'll look at it even more of a distinct outcome here.

When we look at gifting the income interest, the final option.

So, to go back to the client profile we no longer want or need that income but now we don't either have kids or we're not interested in transferring additional wealth to our kids.

Now we're really left at the last option which is to just gift the income interest to charity.

What I do when I gift my income interest is I am giving my interest to the charitable beneficiary.

If I have named Children's Hospital as the remainder beneficiary of my CRT I will give them the income interest they get the entire trust and I get a tax deduction equal to the IRS value of my income interest.

So, remember, we benchmarked and I'll cruise back to it here real quick.

We looked at the value of Ron and Sharon's income interest per the IRS was about $228,000.

If they give that to the charity that would generate a tax deduction of about $228,000 for the Bumps.

So again, very, very different outcome.

Just makes me think we're often asked about this.

I don't hit on this enough in presentations, but we're often asked well wait

I got a deduction when I created my CRT now is this double dipping?

I get another deduction.

If I gift my income interest to charity no, that's not double dipping.

And yes, you do get another deduction.

When you create your CRT, the deduction that you took was for a charity's value for that remainder value.

If 5, 10, 20 years later, you give the other interest to charity the IRS will give you a tax deduction for the value of that other income interest, $228,000 in the Bumps case.

What is that worth to a high bracket payer that's probably worth $80,000 or so.

But more importantly, and what really drives people who gift their income interest is

they don't want the CRT income anymore.

They don't have kids or grandkids that they're interested in using their interest to benefit.

They just want to be done with it.

Pick up another tax deduction.

And that's where the gift can make sense.

What we have gone through these and sort of how common we see income beneficiaries utilize these.

Of course, the sale is going to apply to more people than the rollover and the rollover more people than, than gifting out.

But all of these options are available to you as the income beneficiary of a CRT.

Just to put a bow on this discussion here, in recapping what makes this easy is once we understand what the objective is, if we're maximizing the value for the income beneficiaries,

We're going to be looking at the sale option.

If we're looking to max transfer wealth to kids transfer the value of that income interest to the kids and grandkids, we're going to be looking at the rollover option.

If we're just looking to, uh, maximize the value to charity, pick up another deduction.

We're going to be looking at the gift option for those individuals.

So hopefully that has been clear throughout the presentation in terms of the given the objective.

what the appropriate planning option would be here.

So, I'm just going to talk about here as we wrap up what we would need to value a CRT, to provide a valuation for your income interest.

We do not charge, I should have mentioned this earlier, how are we paid?

We take a transaction fee typically 3% of the sale price, not trust value of the ultimate final sale price for the income interest at closing.

We are only paid if a transaction is successfully concluded, we are paid by the seller at closing.

There are only two fees in connection with the sale.

That 3% transaction fee tied to the sale price and a $2,500 escrow fee that's split evenly

between the buyer and the seller.

So, $1,250 each way.

Those are the only two fees in connection with the sale.

We do not charge to review a CRT.

We do not need documentation to review a CRT.

We just need the near age or birth dates of any income beneficiaries.

The payout rate of the CRT and the approximate value of the trust doesn't have to be exact.

With that information in a couple of days we will get back to you in writing with a review that goes through these options that we've talked about.

Here's what we think we could sell your income interest for.

Here's a couple benchmarks to compare that to.

Here's how our fees work, here's how the tax and legal works and here's how the transaction would be concluded.

We will run that review for you as many times as you'd like over the years.

Certainly many people on the first review said, this looks great.

Let's do it.

But in many cases, it's that second or third or whatever review before they decide that time is right.

That's fine with us.

I mentioned earlier no square pegs and round holes.

I always show Jim, he transacted with us not too long ago now, and I was talking with him

after.

Jim Butler he's in St. Louis, and he and his wife sold their income interest and was talking with him after the presentation or after the transaction.

And he said, “you know, picking up that phone am I going to get the hardcore press here?

I was pleasantly surprised,

And you can see it there in his testimonial.

We do not have a sales team.

You know, what we really, truly do.

If you've gone through our review process before you've seen it we believe

that if you present the options in a clear, unbiased, and as concisely as we can manner.

The decision, it falls where it falls.

So what we're interested in is, is again, that goal is for income beneficiaries to just understand what they can do with their income interests.

Because at any point in time, there's going to be plenty of those income beneficiaries out there who are going to be a fit for us to, to have plenty of work to do.

So, it all starts with that review.

Just understanding what your income interest is worth, what you can do with it.

And we're happy to continue the conversation from there.

If you're interested in moving forward at that time, all we would need in terms of documentation, trust agreement prior three tax returns for the CRT.

So once that decision only once that decision is made to proceed, would we need that documentation.

Do not need that to review your income interest and provide the valuation.

So hopefully this has been enlightening and helpful, informative for everyone on the webinar here today.

Please don't hesitate to reach out even if you just have general questions about your CRT.

We've been doing this a long time, so even if it's not pertaining to one of these options,

we can probably get you an answer and we're happy to do that.

If we can't, we will get you an answer.

But of course, if you are interested in having your CRT reviewed getting that valuation

for your income interest, please reach out.

Contact information is up there on the screen.

We will be happy to run that valuation for you.

Until then, thank you again for joining us here today.

Hope everyone has a great rest of their day, rest of their week, and hopefully we will talk

to you sometime soon.

Thanks again.