3-27-25 Transcript | CRT Experts, LLC

Essential Planning Options for Older CRTs

3-27-25

Speaker: Evan Unzelman, CEO, CRT Experts, LLC

Synopsis

A charitable remainder trust (CRT) may be a perfect fit for a client's situation when it is established. But these irrevocable trusts usually last for decades. Your life has probably changed significantly in the last 20-25 years and it's very likely your clients' lives and needs have as well. Most CRTs in existence today were created in the 1990s or early 2000s and many no longer "fit" with the client's situation today. Clients may have grown tired of the administrative hassles, perhaps they would prefer full access to their future income now, or they may be looking for additional ways to benefit their children.

Webinar Transcript

Welcome.

My name is Evan Unzelman. I am the CEO of CRT Experts and thank you for joining us today to talk about essential planning options for older charitable remainder trusts.

Quick housekeeping note at the outset. We are recording the webinar today.

We'll get an email out tomorrow to everyone.

We'll give you a link to watch a replay of the webinar to forward that to colleagues or clients.

We'll also put a link in there to the slides and speaker notes as well.

If you'd rather have a PDF just reply to the email, let us know you'd rather have the PDF and we'll get that right over to you.

So, let's get started.

Just some brief background on the team here at CRT Experts.

For several of us here at CRT Experts, we have spent our entire professional lives working with charitable remainder trusts.

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

What I learned then is what we'll talk a fair amount about today, which is the income interest in a charitable remainder trust.

The non charitable interest is a capital asset.

And so that's what gives us the flexibility or gives clients the flexibility to do what we'll talk about today what we call secondary planning.

And that's where I've spent most of my career working with CRTs that are pretty deep into their life cycles 10, 15, 20 plus years.

Working with those income beneficiaries helping them first just understand what they own and what that's worth and then working with their advisors to figure out, okay these options.

That we'll talk about today.

Given these options, given the client's situation today and their goals today, does exploring one of these options makes sense.

So that's what we call secondary planning for CRTs the sale of the income interests rolling the CRT income interest into a new CRT with different terms or just gifting the income interest to charity.

But we do run the gamut in terms of the CRT lifecycle here at CRT Experts.

We work a lot at the very front end of the lifecycle designing and working with attorneys to implement CRTs.

Our views towards CRT design are through the lens of the taxpayer, the wealth producer.

What we want to do is maximize the after-tax value for the non-charitable beneficiary, for the income beneficiary.

What that generally means is maximizing the duration of the trust.

So, we want to set that CRT up so that it's going to span in most cases, 55 to 60 years before we fail that 10% remainder tests.

So, we want to, if we can include as many family members.

In a lot of cases, we're using what’s called a life plus term structure to stretch that CRT income stream in many cases for three generations, for the lifetimes of generation one and generation two,

and then for a fixed term of years for generation three, the grandkids.

We want to maximize that duration.

And we also want to give the income beneficiaries flexibility with respect to the income stream.

And what that means is the ability to regulate the cash flows from the trust.

We work a lot with a structure, I'm sure many of you are familiar with, called a net income with makeup CRUT and NIMCRUT and designing it for deferral.

In many cases, the donor of the CRT the initial generation won't take a dime from the CRT.

They're going to donate the assets to the CRT.

The trust will grow, just defer tax free over their remaining lifetime.

And then their kids are taking the income out of a much larger CRT that's been in deferral.

So, maximizing the duration of the trust, giving those income beneficiaries flexibility with respect

to the CRT distributions.

We want to, we need to do all that upfront, of course because it's an irrevocable trust.

But that's where we focus at the very front end of the lifecycle.

We administer CRTs particularly the more complex structures, the NIMCRUT structure that I just mentioned.

But the specialty is what we'll talk about here today.

That's where we've developed the most specialized experience and where we work the most.

Which is, as I mentioned earlier, what we call secondary planning for CRTs.

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

You can see our building up there on the screen.

If you're ever in and out of Dulles airport, look us up.

We’d love to have you by.

For those of you who have heard me speak on this particular topic before, bear with me, because I'm sure you've heard this analogy.

I always, whenever I'm talking on secondary planning,

So we're talking about potentially exiting a CRT or using a rollover to in effect change that CRT.

I always start with an analogy.

Because if we need to make the point that this is not an anti-CRT discussion, obviously we're pro- CRT here at CRT Experts.

But we are talking about potentially exiting a trust that clients created.

And to make the point that this does not mean it was a mistake to create the trust.

I always 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 necessarily going to live in that house forever.

There's a lot of things that would lead us to someday sell the home.

From kids moving or hopefully moving out, a warmer weather state beckons a lower tax state beckons, divorce, death of a spouse, remarriage, job changes.

There's obviously a lot of things that would lead us to someday sell the home.

But the point is, just because we someday end up selling that house doesn't mean that it was a bad decision to buy it.

And it doesn't mean that we didn't drive utility from the home when we lived in it, just means that life changed.

We don't need the big house.

We're tired of mowing four acres.

We want to move to a zero-tax state, life changes.

That house can't move along with our changing lives in all cases.

And we, of course, think that this is analogous to charitable remainder trusts we'll talk about.

One of the drawbacks of the CRT is they are irrevocable.

They're around a really long time which is good if everything just stays the same but of course, life changes.

So, there's this inherent combination in CRTs where we have an irrevocable trust and the client's changing lives.

And that can quite naturally lead to a misalignment deeper into the life cycle of the CRT.

Doesn't mean it was a bad decision to create it doesn't mean it didn't work very well for the client when they have the trust, it just means that life changed and that trust couldn't flex and change along with the client's lifetime.

Of course, CRTs are irrevocable.

Alright, so I know we all know what CRTs are.

We're not here to talk about setting up CRTs and the CRT advantages but let's just hit the pros and cons here at the beginning to set the stage.

So, CRTs as we know are these are tax driven decisions when they're created.

The vast majority of CRTs are created with the goal of deferring capital gain on the sale of a highly appreciated asset.

So, what goes into CRTs are generally highly appreciated property that clients want to sell and in many cases, diversify that position.

They don't want to pay the capital gains tax.

They're not ready just to unload everything to charity.

So the CRT is a nice hybrid between those two.

If my goal is purely charitable or maximum tax deduction, zero tax I'm going to give that asset outright to charity.

If I need the liquidity if I need the lump sum from the sale of the asset, I'm going to sell the asset and pay the tax.

The CRT is a nice hybrid.

We can donate the property to the trust, which can sell it.

Of course, I'm going to pay tax on that income from the CRT very likely at a higher rate than the capital gain rate that I'm deferring upfront.

But my goal is to defer that tax into the future sell the asset, diversify the position without any tax.

Today, I also get a tax deduction for what the IRS projects will eventually go to charity that's down on the list because that's a present value calculation.

So, it's usually a small percentage, usually 10, 15% of the assets that go into the CRT.

The goals from the CRT, I'm setting this up for tax reasons to defer that capital gain but then I'm retaining the right to that income stream.

And from a pretty early point in the overall life cycle, the CRT, that's when I'm garnering all those tax benefits.

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

Maybe I carry that forward, but the maximum there is five years.

So, at a very early point in the overall CRT my benefit with respect to the trust is rooted in my income interest, the right to receive income from the CRT, probably for the rest of my lifetime through joint lifetime with the spouse.

So, good tax planning vehicles.

However, like most things in life, there are drawbacks.

So, the drawback, and I was alluding to this earlier, is this combination of an irrevocable trust.

All CRTs are irrevocable and most CRTs are tied to people's lifetimes.

And so these are going to be around in most cases, for decades.

And while that CRT may be a perfect fit, when it's created if that CRT is in place for 20, 30 plus years the client's life starts to change.

And that we can't flex that we can't change the terms along with the changing life.

And so that's what quite naturally can lead to this misalignment.

10, 20 plus years into the lifecycle of the CRT.

This is a particularly relevant topic now and to demonstrate that we'll take a look at a couple things.

We'll take a look at IRS data on the CRT marketplace.

We'll take a look at some of the data that we've collected or the results from that data over the years.

So, the IRS will periodically release data on split interest trusts, lead, charitable lead trust,

and charitable remainder trusts.

That's taken from the CRTs tax return or the CLTs, the split interests trust tax return, which is called the IRS form 5227.

And one of the things that we can determine from that data or measure is the overall age of the marketplace.

We can look at how old the CRTs are that are out there.

There's about 90,000 split interest trusts in the country.

We can look at what percent of those are lead trust, what percent of those are remainder trusts?

And then we can look at the age of the trust one thing, as you can see up here on the screen that's very apparent is that the CRT market is aging.

If what we can see here is over 58% so majority of CRTs out there are 20 plus years old.

They were created 20 or more years ago.

75% were created 15 or more years ago.

Most CRTs out there are pretty old.

And on the surface it's counterintuitive because CRTs are tied to people's lifetimes in most cases.

If there were CRTs that were created in the 90s all else equal there's going to be less of those than CRTs that were created from 2010 to 2020.

Because some of those people who created those trust in the 90s have died.

If they were term trust, they've termed out but that's not true.

There's still a lot more CRTs even given that the fact that a lot of those CRTs are no longer in existence because people have died or the terms have ended.

There's still a lot more CRTs out there that were created then than in the last 15 years.

The reason for that when we think about it, is pretty obvious. It's the capital gain rate.

So, in mid-2003, the capital gain rate dropped and so not surprisingly, that's when we started to see the tail off in CRT creations as we looked at earlier.

One of the key drivers is rooted in the deferral of that capital gain. It's not the only reason.

Of course, in the late 90s, we had the tech run up.

And so, there was a lot of appreciated property out there.

But sort of the long and short of this is there were a lot of CRTs created.

Then there was sort of the CRT boom in the 90s and early 2000s.

So much so that there are still a lot more of those CRTs out there than CRTs that were created in the last 15 years, so keep that in mind.

And next we'll think about this is intuitive.

Obviously the longer a CRT has been in place the further we're removed from CRT inception when it's the terms that trust is crafted to line up perfectly with the client's situation at that time.

The further we are from that time the more likely there's going to be a misalignment.

We've looked at over the last 23 years now upwards of 9,500 CRTs.

So we've got a good-sized data set.

And what we've seen is generally speaking, these misalignments tend to begin occurring.

We start to see them about 10 years to 15 years.

That's when we would encourage advisors to sit down with their clients who have the trust to start looking at some of these options to make sure the client's aware of what those options are.

And then moving forward, not surprisingly, those misalignments are going to incur, occur at an increasing rate the 15, 20 years we're going to see more misalignments and so on.

So, when we take that conclusion, which is fairly intuitive and overlay it with that IRS data we can see why we believe and the data proves out that this is a very relevant topic today.

So when these misalignments are occurring they start occurring about 10 years and at an increasing rate.

And we can see this is where most of the CRTs are out there.

Most CRTs out there are in this window where misalignments are most likely to occur.

And what we'll talk about today, how to fix those misalignments is most likely to be applicable.

Before we talk about fixing those misalignments let's hit on the tax and legal here which is pretty straightforward.

So everything is going back to a 1972 revenue ruling.

You can see it up there on the screen.

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

And so that's what's going to give us the flexibility to do with that income interest.

What we can do with any capital asset, we can buy and sell it, it can be contributed to a new CRT with different terms, what we call a rollover, or it can be given to charity.

So, everything's going back to that 1972 revenue ruling.

In the 2000s, there was a series of private letter rulings that looked squarely at the income interest in a CRT salability and tax treatment.

Those were helpful because they're looking squarely at charitable remainder trusts.

But all treasury did, and those and the responses was referred to this 1972 revenue ruling.

So that's where the ability to do what we'll talk about here today is rooted from authorities, from a tax and legal standpoint.

So, we're going to talk about the three main options that are available.

One of the things that makes our lives and advisors’ lives fairly easy here when it comes to what option's going to make sense for a given client is that these options are the outcomes are servicing a pretty distinct fact pattern when it comes to the client profile.

So, once we can uncover what's the client's situation, what are their goals we can pretty easily match those goals with the appropriate outcome.

And I'll return to a similar slide once we go through these options and hopefully what will be apparent, is that as long as everything is the CRT is reviewed, we understand what the client's situation is, there's usually an option that's pretty much directly solving whatever the misalignment is.

So those three options, and let's look at these from a from a client standpoint, what's my goal as the as the income beneficiary of the CRT?

If my goal is maximize my own after tax value, most dollars in my pocket we're going to be looking at the sale option.

If I'm looking at this from the perspective of my children in a lot of cases its, I don't want this taxable income my CRT is forcing me to take.

If I could, I would just tack my kids on as income beneficiaries of the trust.

Of course, we can't do that.

But the rollover option is as close as we can get to that.

And so we're going to be looking at the rollover.

If we're looking at heirs or maybe a spouse who's not currently on or is not on the current CRT.

If the goal is charity and we often get here sort of by default.

So, clients are not looking for a lump sum themselves.

They're not, they don't have kids or they're not, they don't want, they're not interested in doing more planning for their kids, then we're really left with we can do what we call gifting out which terminates the CRT gets the client another tax deduction, and they're done with it.

That's really the only alternative other than just waiting for that future income.

So, we're going to hit on all three of these options.

We'll start with the sale.

The sale is the most common of these three options.

The rollover as the awareness of the rollover is ramping up out there.

The rollover is becoming increasingly popular particularly for larger clients with larger trusts.

But the sale is still the most commonly utilized.

In essence, it's pretty straightforward the sale is giving the income beneficiary the opportunity to convert their future income CRT income into a cash payment today.

The sale proceeds, they're selling a private capital asset, so it's a capital transaction.

The proceeds are, are long-term capital gain property.

In most cases there's going to be a change of trustee.

The administrative responsibilities which follow trusteeship those are going to shift onto the buyer.

So from the seller standpoint, I'm selling that future income stream for a lump sum of cash today.

And I'm also getting rid of the CRTs administrative responsibilities predominantly that 5227 that I'm filing each year as the trustee the buyer steps into the seller's shoes as the income beneficiary.

The trust itself is not affected.

It's important to note the measuring lives.

Same income beneficiary, same measuring lives still pays charity at the end of those measuring lives.

Same payout rate. If it's a NIMCRUT same makeup accountant the trust itself is not affected.

It's just a sale of that income interest, the right to that future income stream to a third party buyer.

We're asked a lot. Who, who are the buyers?

First, who's not a buyer? We are not buyers at CRT Experts.

We broker the sale for a fee, typically 3% of the sale price.

Charities are not buyers.

There's a, and I'll hit on this briefly because it's not utilized a lot anymore but there's an option called a termination where it is a deemed sale of the income interest to the remainder beneficiary.

Clients rarely do that because they're not going to get as much money as the sale.

But an important point is the sale is not terminating the CRT.

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

They're taxable individuals, taxable entities but in many cases, they are tax advantage.

So, as an example, the initial group of buyers we worked with 20, 25 years ago now were business partners who had an entity with a large net operating loss.

They had this large NOL, they were looking for income to use up that tax attribute and what proved to be true is what they approached us, or their investment advisors approached us, and with the mindset that, okay, so if we can take as long as that CRT is invested for interest and dividends or put an annuity that's going to kick out ordinary income.

We can take that income as long as we have this tax attribute, not pay the tax on it.

To most people who have CRTs, they're paying tax on that income.

So, there's tax differential between the buyer and the seller which leads to different valuations put on that stream, same stream of income.

So, beyond the obvious, obviously, these, if I'm buying the income interest in a CRT I'm tying up a lump sum for quite some time.

So, good liquidity, high net worth beyond the obvious what we've looked for over the years are clients who have some form of a tax attribute.

We're not picky, just looking for anything.

It could be individuals with capital loss carry, forge unused charitable deductions, entities

with NOLS is a common one.

Any tax attribute that taxpayer has and that they'd be willing to use against the future income stream from the CRT.

That tax differential is what gives us the ability, in most cases, to arrange a sale at a price that makes sense for both sides.

Now, why do clients do this?

I'll break the answer up into what I call the benefits and drivers.

So, the benefits are not usually drivers.

The economics here clients aren't getting a 30% premium or something like that.

This isn't driven by economics, the ability to sell at a big premium.

But, we can, in most cases, demonstrate that the income interest is saleable at oftentimes a little bit above the value of keeping that income stream because of that tax differential between the buyer and the seller.

And that does set this apart from most sales of cash flows.

Most of the time, if I'm selling a future stream of cash flows, I'm forced to take a discount in exchange for that upfront liquidity.

Unless I'm not paying tax on my CRT income which is possible but not common.

I'm probably going to be able to sell that income interest at sometimes a little bit above the value of keeping it.

If we look at things purely from a tax standpoint, again, usually not a driver,

But we can demonstrate that the sale does make tax good tax sense.

So as we saw earlier the income interest in the CRT is a capital asset so I'm going to pay capital gains tax on the sale proceeds.

If I have a CRT and I project that the value of that future income stream is worth a hundred thousand dollars, let's say that a buyer is willing to pay me a hundred thousand dollars.

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

I can sell for a hundred thousand.

I can wait the rest of my life for the distributions and get a hundred thousand.

The tax treatment is not the same though so when we tax effect these two options the sale's going to come out ahead.

In most cases, when we think about the sale proceeds pure capital gain, when we think about that hundred thousand of CRT income, I'm pulling that through.

For the CPAs out there we're pulling that through a four tier accounting structure and it's worse in first out.

So, the ordinary income, any ordinary income that trust is earning has to be distributed first.

As a result, most CRTs are distributing some combination of ordinary and capital gain.

Some CRTs, if they're maybe a NIMCRUT that doesn't include capital gain in the definition of income NIMCRUT that's invested in a variable annuity or heavily into fixed income.

It may be mostly or all ordinary income but in most cases it's some combination.

So now when we look at this from a tax standpoint, I can sell for a hundred thousand dollars of capital gain or I can wait the rest of my life and take that a hundred thousand dollars at some combination of ordinary and capital gains rates.

After we tax affect the options of sale is typically going to come out ahead.

Again, not usually a driver of why people actually pull the trigger.

But once, and we'll talk about those now that I call the drivers.

Once there is a driver present and it makes sense for the client of course as an advisor, we want to make sure that the sale does make tax and, and financial sense as well.

What drives the decision to sell is much more client specific, seller specific.

Nowadays, or at this time of year when everyone's dealing with those tax returns the first bullet there is a common one what we call simplification.

It's just the client is getting tired of filing those annual 5227s for the CRT.

It's usually more around the hassle of it than the cost.

It's they're just trying to simplify their financial affairs.

Sometimes they're concerned that I predecease my spouse, my spouse is going to have to take over as trustee, and then she's going to have to deal with that administration.

But overall, what we would call this is just simplification, just trying to simplify our financial affairs by shifting that CRT administration often to the buyer.

As I mentioned at its core, what the sale does is it's converting a future stream of cash flows into a lump sum today.

So, the decision making for the client is I'd rather have this lump sum than wait the rest of my life for that income.

I could sit here until tomorrow and talk about the reasons that we hear from clients as far as why that is the case.

But it does often come down to family, heirs whether it's kids or grandkids.

And we always joke here at CRT Experts, if the kids always made the decision, we’d do a lot more transactions.

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

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

They sell the income interest they're retaking control of those assets that's in their now back in their estate.

To the extent that I'm part of their planning and they don't spend it all, then there's potentially going to come to me.

So in a lot of cases fairly typical fact pattern is I'd like to sell the income interest.

We're going to invest it, we'll spend it, we'll do some gifting.

Now, whatever we don't use or gift or spend will drop through the estate for the kids.

A lot of times there's myriad of reasons in terms of the specifics around how they're going to deploy the assets.

But a lot of times that does come down to family, but we would couch that just overall and just retaking control of those assets.

So, really quickly on a termination we don't see termination before the ability to sell the income interest, the secondary market existed.

The only way to get out of the CRT for the client was to terminate or commute it.

We do not see these certainly if the goal is, we'll talk about gifting out that is technically a termination.

But if the goal for the client is most money personally in their own pocket they're going to sell the income interest, they're getting a lot more from selling it than they would from terminating the CRT.

We terminated CRT, the valuation of both the interest what charity gets, what the client gets.

Those are bound by what's called the 7520 value of both of those interests.

So, we have to use estate planning.

We pull up our software, plug in the ages, payout rate of the trust, value the trust, and that's going to tell us what those interests are worth.

We're not bound to those valuations when we're just selling our income interest to a third party.

So, again, I go back to the real estate analogy.

I'll compare this a lot to real estate.

When my county will assess the value of my house in terms for purposes of taxation but in most cases that assess value is going to be below what I would get if I just went and sold my house in the real world and it's similar here.

It's just the ability to get more for an asset in the real world than using an IRS formula.

And that's what I'll generally use.

We don't see this a lot but did want to hit on this.

Okay. So what I'd like to do, so we'll use an actual transaction that we recently facilitated.

We'll look at this, this will allow us to attach numbers here to the options.

But then we'll also use the same client, same fact pattern to look at the rollover.

And then, gifting out those two other options.

This is the Rosie family. They are in the Denver area.

Pretty typical fact pattern in terms of a CRT that had been around for some time.

It was publicly traded, highly appreciated stock that went into the trust.

John and Terri, the beneficiaries were receiving 7% a year from the trust just in a different situation when they created it, tired of the administration and they had looked at it.

I think we had reviewed it a couple times before they decided to pursue the sale.

But, late last year, we reviewed it and we arranged a sale earlier this year.

I want to look at those numbers to walk through how we would value the income interest in a CRT.

And we'll look at a benchmark.

Couple benchmarks for that. The valuation is not complex.

There's only three variables.

One of them is already set for us which is the payout rate of the CRT.

The others that we need to look at are, we need to assign a growth rate or an investment return assumed.

And we need to look at the duration, how long that we expect that income stream to pay out when it comes to duration, because most of the most CRTs out there are lifetime trust.

In most cases, we're going to be looking at life expectancy.

We will always look at three mortality tables.

You can see them up here on the screen.

The first or the top there is the IRS 2010CM.

That's the same table that is used when we create CRTs for purposes of calculating what the deduction is passing the 10% test.

That is usually going to be the shortest of these three life expectancies.

Second is the IRS uniform lifetime table.

That's the table that's used or required when calculating RMDs from retirement plans or accounts.

And then the 2012 IAR table.

I don't think I've ever seen this not be the longest life expectancy.

This is a more recent table.

It's derived from the mortality of people who purchased annuities.

So, these individuals have made financial bets on their own longevity.

It also incorporates mortality improvements.

So, what you see here for John and TerrI, they were 78 and 73, we use these three tables to build a range on the duration.

In this case, we got 16, 19, and 21 years for their joint life expectancy.

So, we're going to look at the values over that range, and this is very typical in terms of where those three tables would, would project in terms of shortest, middle and longest.

Once we have the duration, we need to make an assumption for investment return as long as the CRT unless it has 10, 11 plus percent payout rates,

We would, we recommend just peg the investment.

Return to the distribution rate.

Makes for a much simpler even cashflow analysis.

If we have, like in John and Terri's case, a 7% distribution rate on the trust we'll just assume it'll earn 7%.

You see, it's not going to earn exactly that over that duration.

But this is easier to digest cashflow analysis for the client.

I'm sure some people have but we're not interested in running Monte car and things like that.

It's really just meant to give the client a benchmark to assess the sale price for the income interest.

So, once we have those two variables set, our duration and our investment return.

For, in John and Terri's case, they had a $600,000 CRT 7% payout rate we assume 7% investment return.

We've got $42,000 a year just as consistent, $42,000.

And now we can look at what are the values down at those three?

Life expectancies?

We can see the value, depending on what table you're using is going to be between $397,000 and $455,000 for their income stream.

So that's the first and really the most relevant benchmark to compare to the sale price.

Before I jump to the next benchmark, I mentioned it's a simple valuation.

Excel will quickly confirm it.

There's thousands of calculators online that will that will confirm it.

The point here is we can see whether we're using an Excel formula, whether we're going online, we're getting that exact same number for that income interest, $455,092.

And you could see that there in our analysis which is run in Excel.

So that's the more relevant benchmark but it's nevertheless another benchmark.

We will look at the IRS value.

This is the what clients when all they could do is terminate.

This is what valuations that they were bound to so this has just run out of software.

We use two different versions of software just to calculate these values.

You can see, we're just going to input John and Terri's age and payout rate of the CRT, current CRT value.

This is how the deduction would be calculated if they were creating a CRT today with the same value and payout rate.

So, the IRS is going to tell us, here's what the deduction would be, the value of the remainder interest.

And up here we see the value of the income interest and bookmark this value because we're going to come back to this later, this $380,000 so $383,952 call it $384,000.

That's the IRS assigned value of their income interest.

Because if they gift their income interest to charity, the gift out option, that's going to be the value of their charitable deduction.

What these allow us to do is establish a range.

John and Terri were able to sell their income interest for $475,000.

You can see we have this range depending on the life expectancy of 400 to 455.

This is almost always the case where that IRS value is going to be below even the bottom end of our valuation range.

But this is indicative and representative in most cases as I mentioned the income interest is going to be saleable at the top end of that range.

Sometimes a little bit above like in the Rosie's case, they're not getting some huge premium.

This isn't driving people to sell.

But if the sale makes sense for the client we can run through this exercise to confirm that we're getting fair value here for the income interest.

Okay, so we're going to switch over to the rollover.

We're going to stick with the same trust, the Rosie family but we're going to change their situation.

John and Terri they wanted that lump sum.

Now let's, now let's change their situation where they're not looking for anything themselves.

They don't want the 400 or $475,000 of cash.

They certainly don't want to pay tax on cash they don't want or need.

So we can check the sale option off the list.

The next thing we're going to look at is do we have kids that they're interested in benefiting?

Often the way I think about or we'll phrase it is I have a CRT and I would like to find a way to use my income interest in that CRT to benefit my kids.

I can't just undo the trust or change the trust but we do know in the Rosie's case, we have an asset here that's worth $475,000.

I can't change my CRT but I can use that asset, that $475,000 to fund and monetize a new charitable remainder trust.

With the rollover, we're creating a new CRT and now we've got a blank slate, right?

This is a ground up build.

What are the client's situation and goals today?

That's what their attorney's going to reflect.

That's how their attorney's going to draft that new CRT.

In most cases, that's going to mean that income stream's going to be going to children and or grandchildren.

We're going to use our existing income interests to fund and monetize that new CRT.

Not a complicated contribution.

It's just a two-page irrevocable contribution agreement where John and Terri would irrevocably contribute their income interest, that capital asset to the new CRT.

From the buyer's standpoint, they're willing to pay $475,000 for that income interest from John and Terri's old CRT.

They don't care who they're buying it from.

If John and Terri own it, they'll pay John and Terri $475,000.

If they create this new CRT irrevocably contribute their income interest to the new CRT, so that owns it, they'll pay the new CRT $475,000.

At the end of the day, there's in both cases, there's a sale.

In both cases, it's the sale price is the same, but who those sale proceeds are going to is different.

And obviously that's accomplishing very different objectives with the sale.

We've got $475,000 going to John and Terri personally, that goes to their bank account.

They can do whatever they want with that.

With the rollover, that $475,000 goes into a new CRT usually with heirs as income beneficiaries.

Now, beyond the scope of this presentation I mentioned earlier structure of CRT with multiple generations and for deferral, that's what we see a lot here.

What would happen, again go back to the Rosie's, is John and Terri would be the initial income beneficiaries.

Their children would be the successor lifetime income beneficiaries, and then grandchildren for a term of years.

And if we have multiple children, sometimes we have to use multiple CRTs but it's accomplishing the same thing.

We have three generations now.

Two of them are lifetime beneficiaries in a lot of cases.

The initial John and Terri, our example, the initial, the donors, the initial beneficiaries, they're just going to put that trust and deferral.

So $475,000, I looked at this earlier, $475,000 overdrawn and Terri's life expectancy we saw was 16 to 21 years growing tax free would become 1.4 to 2 million in new CRT value.

So now once John and Terri have passed at their life expectancy, their kids would step in.

They take the income now from a 1.5M to $2M CRT until they pass and then it would go to the grandkids.

Outside the scope of this discussion over how that actually works, but if you're interested you can see a web or a link to another webinar that we did on that topic or just give us a call.

Happy to walk you through that. Okay?

Now, let's go to the third option.

But let's go back to John and Terri.

We've crossed the sale option out off the list.

Some clients even who have kids, just they're not interested in doing any or more planning for their kids or they may not have kids heirs.

Once we've crossed the rollover off the list, really just left with sale or you just keep taking the income from the CRT.

But sometimes the goal is charity.

If that's the case or if it's really the only option, secondary planning option that makes sense.

We'll take a look at how it'll work.

We call this gifting out or you're just gifting to charity.

The way that this works mechanically is the John and Terri in our example the income beneficiaries are going to irrevocably contribute their income interest to the charitable remainder men whoever that is.

Let's say it's children's hospital.

Most of the time that's going to be revocable.

We want to vest it. So, it's now a vested interest the charity's interest.

Now, we will irrevocably contribute our income interest to Children's Hospital.

Our example. All the assets will go to Children's Hospital to whoever that remainder beneficiary is, and John and Terri get a charitable tax deduction.

Aren't we double dipping? No.

When John and Terri set up their CRT, they took a tax deduction for the IRS value of the remainder interest of the charitable interest here.

They're giving the other interest, the non-charitable interest the income interest we saw earlier.

It's not hard to calculate the IRS value of that interest.

We saw in our software it's worth $384,000.

We do need to get a qualified appraisal.

That's something else we're asked a lot if the CRTs all cash why do I need an 8283?

\This is for a non-cash contribution.

It's not the assets in the CRT they're giving away, they're giving their income interest away to the charity.

That income interest, as we've seen is a private capital asset.

We need a form 8283 to claim that deduction as long as that the qualified appraiser has software.

This is Crescendo or Number Cruncher or Easy Charitable, whatever we're using.

This is not a difficult valuation to do but you do need to get it.

So now let's look at the three options.

With the sale option we had that $475,000 going right to John and Terri personally with the rollover.

That's going into a new CRT that's benefiting in most cases heirs with the gift option that they're giving their income interest to the charity.

Charity gets the entire trust.

They get a tax deduction equal to the IRS value of the income interest $384,000 which for most high bracket payers is going to be worth $150,000 in tax savings.

I mentioned earlier, I'm going to come back to a similar slide.

As earlier I mentioned, what makes this easy is these are options that are accomplishing very different objectives.

We can hopefully, if I've done a good enough job that should be quite apparent now.

We've got this sale option that's maximizing the client's value.

If the client's more interested in heirs, they still may look at the sale if they want to do immediate gifts or give money to heirs immediately but in many cases, particularly with larger CRTs we're going to be looking at the rollover option.

And then third, if the goal is maximum value to charity we'll look at gifting out and getting another tax deduction and giving the assets to the charity.

So different objective or different options that meet different objectives.

And most of the time, if there's a misalignment we can pretty directly accomplish the client's goals given this flexibility.

It all starts with the review.

You can see up here what we need to review the trust.

You're not charged for the review.

We don't need any identifying information.

Just that's always the first step.

Just making sure the client understands what I can do with my income interests, what the value of that would be, and how these options work for me.

That's where it starts.

As I mentioned earlier, any CRT that's 10 years or older, um, you know, that's when it's usually from just our data standpoint is a good time to start looking at what the client's options are, their flexibility making them aware of it.

We'll put my contact information up on the screen if you have any questions.

Do not hesitate whether it's about secondary planning or design or administration.

Don't ever hesitate to reach out.

Our goal is to be your, the advisor's first call any CRT issue.

Whether it's a potential revenue situation for us or not.

We're always going to be happy to answer those questions.

We strive to be the advisor's first call for any type of a situation when it comes to charitable remainder trusts.

Obviously, if you have a situation where you want to look at one of these options that we looked at today, happy to do that for you at no cost or obligation at a minimum.

I hope this has been helpful, educational, and enlightening for you.

Again, on behalf of all of us at CRT Experts, thank you for joining us.

Please don't hesitate to reach out.

Hopefully we'll hear from you sometime soon.

We hope everyone has a good rest of the day, rest of the week.

And this will conclude the webinar. Thanks.