Selling a CRT Income Interest
5-22-24
Speaker: Evan Unzelman, CEO, CRT Experts, LLC
Synopsis
People often think they are locked into their charitable remainder trust (CRT) because the trust is irrevocable. While a CRT is an irrevocable trust, the trust’s income interest – which you own – is a capital asset that can be sold. A sale converts your future CRT income into a cash payment today and shifts all future administrative responsibilities for the CRT to the buyer.
On this informative webinar presentation, Evan Unzelman, CEO of CRT Experts, discusses selling a CRT income interest. He covers the legal and tax authorities for selling an income interest and the capital gains tax treatment, why people choose to sell, how the sale process works, and answers common questions, such as:
- How is the sale price determined?
- What costs are involved?
- What are my responsibilities after the sale?
- Can the buyer change the charitable beneficiary?
It is an informative and relevant presentation for anyone who has a CRT, and will be of particular interest if any of the following is applicable:
- You are trying to simplify your financial affairs
- You created your CRT 10 or more years ago
- You prefer cash today over waiting for future CRT distributions
- You would rather have your CRT benefit your children
- You want to get rid of the CRT’s annual administrative hassles
Webinar Transcript
Welcome. My name is Evan Unzelman. I am the CEO of CRT Experts.
On behalf of the whole team here at CRT experts, thank you for joining us today to talk about selling an income interest in a charitable remainder trust.
Just a quick housekeeping note here at the outset. For all the live attendees we are recording.
We will send you sometime tomorrow or earlier in the day an email link that you can use to watch recording of the webinar so you can replay it, watch certain parts at your convenience.
Before we get going, just a quick overview of the team here at CRT Experts experience what makes us CRT experts.
For several of us here at CRT experts, we have spent our entire professional careers working with charitable remainder trusts.
Me personally in the early 2000s fresh out of school I was tasked with developing a secondary market for the income interest in charitable remainder trusts. What we learned and what we'll talk about here today is that income interest in a in any type of a trust but certainly a CRT is considered a capital asset. So like other capital assets, stocks, bonds, real estate, closely held stock there’s range of options.
As the income beneficiary of a CRT. You can do with your income interest just what you can do with other capital assets.
You can buy and sell it. You can contribute it to charity. You can use it to create a new CRT for heirs.
There's good flexibility that's available for an existing income beneficiary of an existing CRT.
That's where I've spent and the team here has spent most of our time with CRTs, working with existing CRTs, what we call CRT secondary planning.
Helping people who have. Established CRTs usually fairly deep into the life cycle of the trust, 10, 15, 20 plus years into the CRT, helping them understand what they own, what they can do with it, and attach numbers to those different options.
And really first and foremost, that's what we review ourselves as is a reviewer of CRTs.
Our experience has shown that if the options with respect to the trust are presented in a clear unbiased, concise manner. The decision as far as what to do with the income interest in the trust is usually a pretty easy one to make.
That's where we focused working with income recipients of CRTs, their advisors, their families, helping them understand what their options are.
And of course, if one of those options is something that they want to pursue, we're happy to help them utilize the option.
At last count early January of this year, the team here at CRT experts, we looked at north of 9,000 CRTs over the last 20 plus years.
Lots of experience working with existing CRTs. And that's what we'll talk about here today.
We’re headquartered here in Leesburg, Virginia. Just outside about 45 min outside of Washington.
I'm not far from Dulles Airport if you've been in or out of Dulles.
Our building here is on the right. I'm a West Coaster originally. I've been back here in Virginia for 20 plus years now but being from the West Coast I'm always interested and amazed.
On the history back here and our building is no exception to that. So always tell people if they're back in the DC area visiting DC, whether you're interested in what we do or not stop by and, will be happy to show you around the building.
Whenever I'm presenting on this particular topic, we're talking about potentially exiting a CRT with a rollover, making changes effectively making changes to a CRT.
I always start with an analogy and that analogy is to make an important point. This is not an anti CRT discussion.
As we'll see, it's really natural that a CRT, that there will be a misalignment later on in the life of the CRT.
And so, we want to break apart. The decision when we created the CRT from the decision many years later with respect to what we're going to do with the income interest today.
And to drive that point, we use what we call the house analogy. You've heard me present before, you've surely heard it, so I apologize for the repeat.
I want to make want to make this point here at the outset. So, when we think about buying or maybe building a house one thing that's probably true is we don't necessarily go into that decision-making process with the mindset that we're going to live there forever.
There's a lot of things in our lives that will change. That would lead us to sell the house, you know, the kids growing up and hopefully moving out.
Tired of mowing 4 acres, we want to downsize health changes and we want to move into a smaller home, a warmer weather state beckons a lower tax state beckons.
There's a lot of things that would lead us to sell the house, but the point is just because we someday sell it doesn't mean it was a bad decision to purchase it.
Doesn't mean that we didn't drive utility from the home when we lived in it didn't serve us well for many years.
And we think this is a good analogy for CRTs. You know, CRTs are put in place for good tax reasons.
We'll talk about those on the next slide. But there's this inherent combination with the CRT that we'll talk about in 2 slides.
That in many cases quite naturally. Will lead to a misalignment between our situations now. And the situation we were in.
Many years ago, decades in most cases ago, when we established this CRT and its irrevocable terms.
Like many most things in life, there's pros and cons. Let's talk about the advantages and disadvantages of CRTs.
So certainly, from an advantage standpoint, it revolves around tax. CRTs in in most cases CRTs are created to defer the capital gains tax on highly appreciated property.
For all of you on the call on the webinar who have a CRT chances are you funded that CRT with appreciated in many cases probably highly appreciated property.
You wanted to sell that property, but you didn't want to pay the capital gains tax. So, the CRT of course can sell it.
It's exempt. The capital gain is allocated to the CRTs accounting tier for capital gain income, and you'll pay that capital gain come over time as you take distributions from the trust.
The primary goal of most CRT creations is to capital gain deferral or tax deferral.
Secondly, now notice we said deferral, not avoidance. If I have appreciated property, I want to avoid the capital gain.
I'm going to give that property outright to charity. So, what the CRT is doing is just deferring that tax into the future.
In most cases I'm going to pay tax at a higher rate than my capital gain rate. Because any ordinary income that that trust turns moving forward has to be distributed to me first.
I'm usually going to pay some combination of my ordinary and my capital gain rate on the distributions from the CRT.
The goal first is to defer the capital gain. But again, I'm not giving that away.
I'm retaining an income interest in the CRT. The second goal if the driver is the fact that I'm retaining an income stream.
In most cases that income stream is going to be tied to my lifetime or joint lives with my spouse.
This income stream is going to be around in most cases for quite some time.
And thirdly, certainly not a driver. If my goal was the tax deduction, the maximum tax deduction, I would have just given the property way outright to charity.
I do receive a charitable tax deduction and upfront deduction in connection with creating the CRT for what the IRS eventually projects will go to charity.
The IRS is making a present value calculation of the remainder interest and that's what my upfront tax deduction is equal to.
The CRT is a split interest trust with two interests. My income interest. And charity owns what's left in in the trust the end of my life or joint lies with the spouse.
That’s what I referred to as a charitable or the remainder interest. So, when we look at the timing of the benefit of these advantages of creating a CRT, they're quite front loaded with respect to the taxation, right?
I'm deferring the capital gain. Are you usually in the 1st year and that's when the property is sold and that capital gain is deferred.
My upfront tax deduction, I might carry that forward for a maximum of 5 years, but that’s achieved very early in the life of the CRT.
From a sort of a macro view, if you look at the lifespan of the CRT, which is decades long, the tax benefits are really achieved.
Early in the life of the CRT and then moving forward, my benefit with respect to that trust.
The income interest, my right to receive income from the CRT.
On the flip side, I talked about this combination earlier and this is what leads to quite naturally the need for secondary planning, what we'll talk about here today.
When we think about that combination, we have an irrevocable trust. So when we create a CRT.
That is the terms of the trust the key terms who the income beneficiaries are. The payout rate of the trust.
The type of CRT, there's different, there's different types of CRTs.
All of that is set in stone. That cannot be changed. When we look at the duration of the trust, how long we expect that income stream to last because it's tied to people's lifetimes.
In most cases, we're looking at 20, 30, 40 plus year durations on the trust.
When we look at that combination. It's not surprising that as we get deep into that CRTs lifespan.
Typically, 10 plus years is where we start to see some of the misalignments. It's not surprising that they occur because we have a trust that can't change.
But then we have our lives and while that's a perfect fit upfront. The further we get from the inception the more likely we're going to be in a different situation now than we were when we created the CRT.
And that goes back to the house analogy and it's what we hear probably more than any other sort of a general view of why I'm looking into this if I sell the interest for if I'm just looking at it.
What we hear a lot is it's just run its course. It, I don't regret it.
It was a good fit, I did it for tax reasons. It distributed a lot of income over the years.
It's run its course. I'm tired of administration. And so I'm looking into my alternatives.
Before we get into the alternatives, let's talk about why they exist. So why does this flexibility exist?
From a tax and legal standpoint, certainly understand that that, everyone on the call today is, you know, we aren't, we aren't tax advisors, we're not tax attorneys.
But the tax and legal on this is actually quite simple. Everything is going back to a 1972 revenue ruling.
It's a good old ruling at the Treasury's use this is used this for all sorts of guidance.
Throughout the years, the older the better generally when it comes to these old revenue rulings. This is a revenue ruling in 1972 which says that an income interest in a trust, any type of a trust.
Is a capital asset. So the sale proceeds from the sale of that. Are thus capital gain property in the hands of the seller.
There were some, what are called private letter rulings or PLRs. This is when a taxpayer and their attorney will write to the IRS, pay a hefty fee.
And ask the IRS about a particular topic. And if the IRS feels like it, they will respond and that response is public.
Now this is not authority. But it's a very good way to understand how the IRS looks at certain issues.
So, in the early to mid-2000s the IRS issued several private letter rulings on the sale of an income interest in the CRT.
Now these are helpful because they're looking squarely at a CRT and income interest in a CRT.
Not just a trust in general. But all those PLRs did is refer back to that 1972 revenue ruling.
That's where we're all of our legal, and tax authority, the authority with respect to the ability to sell the income interest.
And the taxation. That's where all that is rooted. So, what this does is it means that anyone who has a CRT that's been in place for more than a year.
Owns a capital asset. That can be sold at their long-term capital gain rate. Now, the way that I will often describe this, your income interest in your CRT is a private capital asset.
Think about other private capital assets. Think about real estate being probably the best example. Closely held stock.
Many of you who are on the webinar today probably funded their CRT with closely held stock and in many ways just it's the same as a public capital asset publicly traded stock so think about what we can do with these assets. What can I do with a piece of real estate?
Well, I can sell it. I can donate it to charity. I can use it to create a CRT.
All of these options are the same options with other capital assets are available to any income recipient of a CRT.
It's not full flexibility. We can't unwind the CRT.
We can't change those irrevocable terms. But the fact that it's a capital asset creates these 3 alternatives, which in our experience generally are going to solve any misalignment.
Those misalignments really come from different directions. And of course, we're going to talk about the sale today in detail, but I just want to overview what these options are here.
Just for those who might be might be interested, will certainly do other webinars, and will drill on particularly the rollover which is which is a technique we developed 10 to 15 years ago that takes the income interest in a CRT. Let’s backup a little bit what we were hearing a lot in the late 2000s was when we were talking to income beneficiaries of CRTs who
Didn't need any of the income they wanted their kids to benefit from the CRT if they could, they would have just added their kids to their charitable remainder trust as income beneficiaries.
It's a concept called decanting a CRT. We can't do that.
We can't decant to CRT. We can't change any of those irrevocable terms.
We developed a technique called the rollover where we know that the income interest in the trust is an asset.
It has market value. And so, we will take that income interest and use that to create a new CRT.
Now we have a blank slate. We can put the kids and grandkids on as income beneficiaries of the new CRT.
So that's one of the things we can do because of this the tax treatment, the flexibility, the fact that the income interest is a capital asset we can use that income interest to create a new CRT.
Usually because we want different income beneficiaries often heirs, children, grandchildren but sometimes it's a spouse who may not be on the current CRT.
If our goal is, is predominantly or solely to maximize value for my for my heirs we're going to look at the rollover option.
If my goal is to maximize value for charity. We're going to look at what we call the gifting out, the gift out option.
What we're going to do here is we can, again, my income interest in my CRT is a capital asset, so I can give that to charity.
That will trigger another tax deduction for me. So, we're asked a lot, well, is that double dipping?
I already got a deduction for the trust. Yes, when you set up your CRT.
Your deduction was based on the charity's interest in what the IRS projected would eventually go to charity.
Now you're giving the other interests, your income interest, the non-charitable interest in the trust to charity that will qualify for a charitable deduction.
If my goal is not the kids, not myself, it's just charity. That's a good option.
The most popular option and the one that we see thus utilized most is the sale option. This is most often someone who's saying, I want to make some changes with the trust and my goal is my bottom line.
I want to extract the most after tax value for myself. I'll talk about some of the drivers of the sale.
This could still very much be revolved from a goal standpoint around my kids and heirs or grandkids.
It's just a different way of benefiting them. This is freeing up a lump sum of cash.
The sale is freeing up a lump sum of cash. The sale is that I can use to benefit my kids today.
In many cases it's well I'm going to use it or I'm going to invest it and I'll pass it through my estate.
So, it can still benefit the kids and grandkids but really the way that I will describe the sale option.
Is it's maximizing the value for the income recipient. And so, we can see this is what makes our job.
Easier is when we're reviewing the CRT, we're going to lay the options out. But generally speaking, the family's goals are going to revolve around one of these 3 options.
And so, it's a fairly distinct goal set, which leads to a distinct option. But today we're going to talk about the sale of the CRT income interest.
And which as I mentioned is by far the most common exit we see from the CRT, most people by selling the income interest.
In essence, you know, really at the core, what the sale enables you as an income.
Recipient to do is convert the CRTs future income stream. Into a lump sum today.
Another big advantage is there's also a change of trustee. So most income beneficiaries are their own trustees.
It's called self trustee trust. So, in connection with the sale. You would resign as trustee and appoint a successor trustee, either the buyer or one of their advisors.
What that does is it shifts the administrative responsibility off of you to the buyer. So, the administrative responsibility for the CRT follows trusteeship.
So, the change of trustee is contingent upon the sale. So at the sales closing.
The trustee will change from you. To, again, either the buyer, one of their advisors.
And, but in, in that you have, you are getting rid of all the future administrative responsibilities with respect to the trust, those are assumed by the buyer.
When we walk the advisors through it, they understand it. They'll ask us that. So when we're asked, well, what do I look for?
Why would, why do people sell? I will break the answer into 2 buckets. The 1st is what I call the sale benefits.
And the second or the sale drivers. The sale benefits do not typically drive transactions. These are not things that we hear a lot from sellers but they're still very important considerations.
I mentioned one already, the economics of the transaction. We can typically demonstrate that we can arrange a sale.
At a value that's equal to sometimes a little bit more than the value of keeping it. Now that is different.
That really distinguishes a point of establishment between this and many sales of future cash flows. In most cases, if I'm selling a future income stream, I'm forced to take a discount in exchange for that upfront liquidity.
If I'm selling an annuity or if you've seen the structured settlement commercials at JG Wentworth.
In those cases, yes, they're providing liquidity. But this the seller is forced to take a discount in exchange for that liquidity.
So other than the time value of money, we have to present value the future income stream, but we're not taking a discount to that present value.
Taxation in certain environments, this will drive sales. This would drop down to that driver bucket when someone has the expectation that tax rates are very likely going to rise.
This can become a driver because when you sell, you're locking in the current long term capital gain rate on all of your future income.
If we look at a situation like, 2012. When the capital gain rate in January 2013 went from 15 to 20 then the 3.8 push, point 3.8%.
That was almost a 60% increase in the capital gain rate. If someone is expecting and fearing future tax increases, this this can be a driver, but typically it's just what I would call a benefit.
And by benefit, Let's just assume that. I own a CRT income interest and I have the opportunity to sell it for $100,000 and according to my analysis, I think that I will get $100,000 of income if I wait and take income from the CRT.
Over my remaining lifetime. So I'm in different on a pretax basis, 100,000, 100,000.
But when we tax affect those 2 options, when we apply taxation, The sale comes out ahead. The sale, that 100,000 from selling, is at worse going to be all long-term capital gain income.
The income from that 100,000 from in future CRT income is very likely going to be taxed at least partially at my ordinary rate in many cases depending on how it's invested, mostly or fully at my ordinary rate.
So what would I rather have, $100,000 at my current long term capital gain rate? Or $100,000 at some combination of my future ordinary and capital gains rate.
If we look at it purely from taxation, that is a benefit as well. Mortality risk, when I sell my income interest I am shifting mortality risk with respect to the trust to the buyer.
If John DOE buys my income interest. John DOE is making a financial bet that I will live to or hopefully beyond my life expectancy.
When I sell. I've shifted that to him. I no longer faced mortality risk that the financial risk that I will die prematurely and not collect as much as anticipated from the trust.
Not a reason we hear a lot. People don't like to think about their own mortality. I mean, it's not something we hear a lot.
From, from sellers. What does drive sales? The 1st one is and probably the most common.
What we hear the most, what we call simplification. It's just It's sort of coming from 2 directions.
One is I'm just trying to simplify my financial affairs. In many cases, there's some concern that when I pass away the trusteeship will shift to my spouse.
I don't want her to have to deal with this. In some cases, it's more just being tired of the CRTs administration.
That 5227 that has to be filed every year In many cases, it's holding up my personal tax returns.
So overall, we drop this in the broad simplification. A definition. That's really what it comes down to is, the ability in connect with the sale to get rid of that future administrative complexity.
Flexibility of cash, the way that I explain this is you know I would rather have a lump sum of X then wait the rest of my life for the future CRT income.
And the reason for why that is I could prattle on until tomorrow at noon about that.
Obviously, there's a lot of different reasons and in many cases it's family. As I mentioned earlier, I want to invest in a child's business.
I want to set up a 529 plan for grandkids. I want to use the money myself and then leave what's left to my kids.
A lot of times it revolves around family. We wish the kids always got to make the decision.
If we think about if my parents have a CRT. There's no benefit direct benefit to me when they die, everything goes to charity.
If my parents sell their income interest and retake control of that cash lump sum. And I'm included in there, they're planning whatever they don't spend of that can be given to me.
From a family standpoint, that is heirs. That is often behind the driver behind the transaction as well.
And then finally just depending on what sort of an environment we're in, there's some concern now.
Around the Biden tax increases. If I'm concerned that my, my future tax rate is going to be higher.
The sale is going to be attractive in that it's as we talked about, it's effectively converting that future CRT income.
Into a lump sum today. At today's tax rate. So, if I'm concerned that my tax rates are going to rise, this is going to be going to become attractive to me.
Political uncertainty economic stock market uncertainty sort of this this hedge that we hear quite a bit from sellers as well.
Obviously, many more reasons. A lot of times, as I said, it just comes down to the income beneficiary situation, but those are certainly some of the more common reasons.
That we hear.
Before we jump into a case study to sort of bring this to the, where the rubber meets the road, just how does, how does it work?
First again, and I'll talk about what we need to review a CRT later, but it's not a lot.
We don't need any documentation. Just 3 things that we need to review the trust. We do not charge for the review.
But once the decision has been made, okay, I'd like to move forward. How does that process look?
Work and how long does it take so the 1st thing that we'll do is review the trust agreement And the CRT's prior 3 tax returns.
Make sure we don't spot any issues which are rare. Once it clears internal review, will prepare the sale documents.
We will send those to both buyer and seller to review and sign. The documents can be signed electronically or wet signatures, we can accommodate either. The sale, the closing itself, it's an escrow style close.
It takes place at Wells Fargo Bank under the supervision of an escrow agent. There are 3 escrow accounts.
One for the buyer, one for the seller. One for the trust. The buyer jumps 1st so to speak so the buyer will fund 1st so the buyer we require 105% of the gross anticipated purchase price.
The buyer will transfer that. In cash from their assets into their escrow account. We will provide you, the trustee with written composition of that.
You will look at a snapshot from Wells Fargo's basic banking portal that shows you the buyer has funded their account with more than what is required.
To satisfy the purchase price. The trust is then moved into escrow. There's a final purchase price calculation.
The way that, and you know, as I'll mentioned, when we, when we look at a CRT and provide a quote for an income interest.
All we need is an approximate trust value and the reason is, the quote for the income interest is tied to the trust value.
If my quote from my income interest is based on a trust value of $500,000 if the trust value at closing the final trust value at closing is up 5%.
My purchase price is up 5% and vice versa. So, there's a final purchase price calculation.
Then, we arrange for the payment from the buyers escrow account. That's wire transferred to you.
Typically, same day. If the trust assets come in too late later in the day after 3 PM.
It’ll be the next business day. So, it's not a long escrow. At the end of the day, closing these closing conditions as soon as they're met.
The seller is paid by cash. The trusteeship is transferred to the buyer, so the buyer has the future administrative responsibilities and the income interest, the future the right to the future income from the trust is transferred to the buyer.
2 to 4 weeks is the typical just timing. You know, we it's completely turnkey.
We've done a lot of these. We've really streamlined it over the year. We, over the years, we provide all the documentation.
Our closing team will guide the way from beginning to end. Just 2 or 3 people here that you would work with, throughout that closing process.
It's a simpler process than, than what it might seem on the surface. We hear that we hear that all the time.
I always like to walk through it and break it down for people.
I want to look at an example. This is a transaction we arranged earlier in the year.
This is, the CRT, Russell and Kathy. Rhode Island residents. They had created a CRT in the late 90s and as I've been talking about as we hear all the time it just run its course.
They're getting 8% a year. From a planning standpoint, a different situation, tired of the trust.
Tax return. So, we reviewed the CRT and they elected to sell their income interest.
What I wanted to do is go through, look at that income interest and talk about the valuation process.
How a CRT income interest is, is valued. It's not a complicated valuation.
There are only 3 variables. One of them is already set. The payout rate of the CRT is what it is.
In this case, it's 8%. So, the 2 variables that we're going to look at are the duration of the income stream.
How long do we think that income stream will last? And because most CRTs are lifetime trusts, the income streams tied to people's lifetimes, we're going to use mortality tables to estimate the life expectancy.
And then secondly, investment return. What do we expect in terms of future investment return? So, let's look at both of those.
What we don't want to do is, and what we will not do is just throw a number.
How will what's it worth? We think we could get X in the sale. What we want to do is place that in context.
We'll provide 2 benchmarks to compare to what a buyer would be willing to pay for the income interest.
The 1st of those benchmarks is just a simple present value analysis of the future income stream.
And you'll see that we use a range to estimate that based on the duration of the income stream and then the second is an IRS benchmark.
When we're looking at duration of the income stream, we need to make an assumption around life expectancy.
We use 3 different life expectancy tables, which you can see up on the screen. The 1st is the IRS, 2010CM mortality table.
This is the same table that's used when a CRT is created. So, when the CRT is created, the IRS uses your life expectancy in its calculation of what it expects will eventually go to charity.
Everyone who's on this call has a CRT. This table was used or its predecessor, the 2000CM mortality table.
This was used when calculating your tax deduction. This typically will estimate the lowest life expectancy as we can see for the Shippee’s.
Second is the IRS uniform lifetime table. This is more commonly known. This is the same table or the table that's required when calculating required minimum distributions.
RMDs is what they're lovingly called, from retirement accounts. And then 3rd and this will typically be about 2 to 3 years depending on the facts longer than 2010CM.
Then 3rd which will estimate in pretty much all cases the longest life expectancy is the 2012 IAR table.
This table is A: based on more recent data. And B: it incorporates projected mortality improvement.
You can see for the Shippee’s for two 75-year-olds, we are getting 17 years from 2010CM, 19 years from the RMD table and 20 years from the IAR table.
So that's 17 to 20 years gives us our expected duration. So, what's that income interest worth if we live 17 years?
19 years and 20 years.
Second is investment return. Generally, we recommend using an expected or better than expected investment return.
The reason is this is a benchmark we're using to assess the purchase price.
We'd rather overstate this benchmark than understate it. In most case, this translates to is unless the trust has a very high pay out rate, 10% or higher. We see anywhere from the minimum 5% to the 9%, typically we will just peg the investment return to the payout rate.
That leads to a real simple analysis. If we have the same, we're assuming in the Shippee’s case, the CRT earns net of any administrative investment fees 8% a year and it has to distribute 8% a year we have in a consistent payout.
So, it's like an annuity stream. In this case, with the Shippee’s, they had $595,000 in their trust.
You can see it's about $47,600 per year.
Now, is it going to pay out exactly that much or earn exactly that much here? Of course not, but in terms of just keeping the analysis simple, we'd rather overstate and then if we can, we will just peg the investment return assumption to the payout rate to get analysis that looks similar to what we have up here on the screen.
We can see in this case we have $595,000 in the CRT. The trust is earning 8%, distributing 8%, so it's ending with the same value every year that leads to this consistent, $47,600 cash flow stream.
Then we'll look at again, 17 years, what's that worth? 19 years and 20 years and you can see we're getting a range here as far as the value of the income stream that that ranges from $434,000 at the bottom end to $467,000 at the top end.
They were able to sell their income interest for $475,000. So that's very typical.
It's at the top maybe a little bit above is a very typical outcome.
We provide the tools to confirm it, but it's very easy to confirm this, this calculation here.
You can see just in Microsoft Excel confirming that we're looking at the top end of that range, that $467,344.
You can see that's the exact same number that Excel is going to give you. This is from Moneychimp.com
It's just a present value of an annuity calculator probably thousands of these online and you're getting the exact same number.
It's a pretty simple calculation. What this boils down to is the right to receive.
$47,600 a year over the remaining lifetimes of two 75-year-olds is worth about $467,000 in today's dollars.
The second benchmark is the IRS benchmark. Now, this will almost always be below the value.
Even at the bottom end of that range. So, from that standpoint, it's not as useful of a benchmark, but it's a government benchmark.
I compared a lot to an assessed value of a house. In most cases, if I list my home and go out and sell it on the secondary market, I can get more than the assessed value.
It's a good way to think about this. So selling it on the secondary market to a 3rd party is typically going to fetch quite a bit more than where the IRS would value that same interest.
To get that IRS value, we just run the same calculation that we would.
If you set up a CRT with the same terms as yours today. So, with the Shippee’s, we can see same trust value, same ages today, same payout rate.
This is, Crescendo Interactive software.
So, you need software to calculate this. The IRS value. So, you can see down here that the IRS puts a value on the remainder interest of about $183,800.
We can take the trust assets, subtract that remainder interest to get the IRS value of the income interest, which is about $411,000.
And we can see that's repeated up here. So, what this is saying to IRS Form 709 gift.
What that's saying is if the Shippee’s were to create a CRT for their kids.
They're giving their kids this income interest, this income stream, the IRS values it at that amount, the IRS value, the income interest.
That would be the gift for gift tax considerations. So that's the second benchmark that we'll use.
Again, not as useful, but still one that we will always share, and we will do this in the review. As we're concluding, we have now established a range for the value of the income interest.
Now we're using different sources. We're using the IRS in some cases. A secondary market.
We're using our own assumptions. In terms of investment return and different life expectancy tables.
It's, $411,000 to $475,000. It's a pretty good range there, in terms of what that's worth.
And we can see what has gone into that is just different assumptions. Different assumptions in terms of more mortality.
Life expectancy and investment return.
As I mentioned, the Shippee’s were able to sell their income interest for $475,000. Mr. Shippee was kind enough to give us a testimonial. What we will always tell potential sellers, look, go through
The review process if you decide that yes, this is something you'd like to move forward with at that point, we can connect you with any number of prior sellers.
Certainly, understand that sometimes it's valuable to get the perspective of someone in your shoes, someone who's gone through the process.
So, always what I always say is, I will give you references until you're tired of talking to them.
You can always go to our website. And look at other written testimonials from recent sellers up there, as well.
Okay, so as we put a bow here on our discussion today, I want to just go through a few questions that we commonly get.
Now most of these we'd answered, but I just want to go through these again. Just because these are questions that were asked a lot.
I always like to just make sure that we've, we've clarified what the answers are.
So how much would I get if I sold? I can't give you that off the cuff, but with very little, as we'll see on the next slide with very little information.
We can review your trust and provide a written review showing you what your income interest is worth. Going over the tax considerations, fees, how the process works, etc.
What are the tax considerations we saw because of that 1972 revenue ruling the income interest is a capital asset proceeds or long-term capital gain property.
What are my responsibilities after the sale? None. So, once you sell on that trusteeship moves to the buyer one of their advisors that shifts all the future administrative responsibilities to the buyer.
You have no future responsibilities with respect to the sale, namely that that annual tax return or with respect to the CRT, namely that annual tax return.
What are the fees? Our fee is typically 3%. For CRTs where it's $100,000 and up on the sale price is going to be a 3% fee.
That is tied to the sale price and is only paid at closing. If the closing occurs.
We're not paid unless the transaction is completed. We do not charge. Review the CRT.
Even if we go through the review process, we draft a sale purchase agreement and for whatever reason that doesn't close, we are not paid.
We're only paid at closing from the sale proceeds that 3% fee is tied to the sale price not to the trust value. There's also a fixed $2,500 ask for fee split evenly between buyer and seller.
So, $1250 each. Those are the only 2 fees charged against the sale proceeds and that will be in writing in the sale in the review.
And again, those are only paid if the transaction is consummated. Can the buyer change the charitable beneficiary? No.
The only person who can change the charitable beneficiary of a CRT is the donor.
In most cases, if you retain the right in the trust instrument to change the charitable beneficiary.
You couldn't sell it to someone else if you wanted.
That would be what’s called self-dealing. So no, the answer to that question is no, now some buyers will ask for a change of charity.
Then it's up to the seller. That's something that they'd be willing to do.
So, for example, if we have, if you've named United Way as the current charitable beneficiary, the buyer asks you to change it to Children's Hospital.
It's up to you whether or not that that would be acceptable. The one thing I always say is if there is a change, it can only be accomplished by you.
It's transparent and irrevocable. So, it's up to you whether you wanted to do it.
It's transparent in that you know what charity it's going to. And it's irrevocable.
It cannot be changed again. That's important for both you and the buyer to know that it could not be changed again.
But the key thing to note here is the, the ability to change the charitable beneficiary is not something that the buyer can never do.
What role does health play in the sale? This cannot be what's called a deathbed transaction so what that means is, one cannot be knowingly terminally ill and sell the income interest in in their CRT.
The more practically in the sale purchase agreement, you would have to make a representation that you do not knowingly have.
That doesn't mean you have to go out and get a doctor's note, physical or health exam.
I must be willing to make the representation that I do not have an immediately life-threatening health condition or incurable disease such that there's less than a 50% probability I'll live a year.
What that translates to is I cannot be knowingly terminally ill. As long as I can make that representation.
I can sell my income interest. We have certainly passed over the years by buyers, for underwriting and physicals and things like that.
Just a decision we made early on. It's just not, we need to make that representation as long as we can make that representation there would be no barriers to the sale.
Are references available? Yes.
What do we need to review a CRT? You can see up on the screens just 3 things, the nearest age or ages of any income beneficiaries.
DOBs are preferred. If not nearest age, as long as you're within 6 months.
If I'm 60 and I'm within 6 months of being 61 then I'm 61.
It's easiest just to get the birth date. Pay out rate of the trust. We saw with the Shippee’s, 8%, probably somewhere between 5 and 10%.
And then the approximate trust value with those 3 pieces of information. Just takes us a couple of days to put together the written review.
Again, no cost, no obligation there. As we wrap up just one thing.
Our approach here. I mentioned this earlier, I always frame it is, no square pegs and round holes.
Jim Butler, he's in St. Louis just recently the last couple weeks sold his income interest. I put this up here because of one of the things he said in his, his testimonial here is, never felt any pressure to make a quick decision.
If that was our approach I would probably sit up here and say it wasn't but it's just not the way we operate.
If you've ever reviewed with us before you know that I believe strongly to just present it in a clear unbiased manner and the decision is what it is. It's going to fit where it's going to fit.
What we're after is just making sure that we'll never achieve it, but there's about.
90 to 100 thousand CRTs out there in the US. We would love that if every beneficiary out there understood what we've gone through here today.
What their income interest is, what they can do with it. Once that's achieved, as I've mentioned, it's very much an individual decision.
It fits where it fits, if it is a fit, we're happy to help you utilize one of the options.
If not, you know that these options are available. In many cases, like with the Shippee’s for example I think there was 2 reviews before we ended up transacting. We'll review that as many times as you'd like it no cost. It's not a lot of work for us to review the trust and we just believe.
It really starts with information and with education. So, I just wanted to conclude with that.
I will put my contact information up on the screen here. Even if it's just a general CRT question about.
The way your CRT is working or something on the tax return. We've looked at a lot of these.
Like I said, 9,000 plus at last count. So, it’s a question I can very likely answer on the spot, if I can't, I will get you an answer.
Very likely I can answer just general questions on the spot for you. Happy to do that. But of course, if you're interested in reviewing your CRT, understanding what your options are and the numbers attaching numbers to those options.
Give us a call, shoot us an email. My contact information is up there. But at a minimum, I hope this has been informative and enlightening for everyone who's on the presentation here today.
Really appreciate you taking the time to learn about these options. Again, please don't hesitate to reach out.
And hopefully we'll hear from some of you soon. Until then, I hope everyone has a great rest of the day, rest of the week, and thank you again for joining us.