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Optimized CRT Design: Building to Maximize Donor Flexibility and After-Tax Value

5-9-24

Speaker: Evan Unzelman, CEO, CRT Experts, LLC

 

Synopsis

When establishing charitable remainder trusts (), most clients want to maximize both flexibility and after-tax value.

This usually means the trust should span for the longest duration possible and allow for periods of income deferral.

Unfortunately, most aren’t designed to do either.

Evan Unzelman, CEO of CRT Experts, discuss flexibility that is available but not often utilized when creating. The presentation focuses on two topics in particular:

Trust Duration: A CRT can be structured so that after the donor and spouse die, the donor's children can receive the income. In many cases, after the children die, the donor's grandchildren can also receive income. There is no stated maximum possible term, but the expected life of most  can be fifty to sixty years.

Income Deferral: A properly constructed, and properly managed CRT can provide for periods of tax-free deferral when no payments are made to the beneficiaries and the trust assets grow tax-free. This can significantly increase the income paid to future beneficiaries while reducing the taxable income of current beneficiaries.

For each component, Evan discusses how it works, how it’s implemented, and how to ensure it's being fully utilized.

Webinar Transcript

 

Welcome.

 

My name is Evan Unzelman, and I am the CEO of CRT Experts

 

on behalf of the team here at CRT Experts.

 

Thank you for joining us today to learn about how to design charitable remainder trusts that maximize the donor's flexibility.

 

and in turn their after-tax value

 

for an irrevocable trust. There's a lot of flexibility a CRT can provide that's unfortunately not

 

not often fully leveraged. And we're going to talk today about what that flexibility is, and how to incorporate it in the CRT's upfront design.

 

We are recording this webinar.

 

We'll send a link to re-watch it, or parts of it to all participants as soon as that recording is available.

 

So just a bit of a lay of the land, so to speak, for the webinar today we'll talk about

 

what, how we define maximum flexibility, and why it's rarely achieved.

 

We'll talk about the 2 components that we in our experience, we believe, are most often overlooked or underutilized with respect to.

 

flexibility, that is, duration and deferral.

 

for each of those components, we'll talk about how that the each is worked into the trust structure, how it works, where it's supported in the Regs. We'll talk about different ways to implement each structure. And best practices, we'll offer up some recommendations. In terms of how that's implemented.

 

We'll then continue talking about these 2 components but do so through the context of a case study. We’ll be talking a little bit upfront, but we'll be focusing on the Jones family. Later in the presentation.

 

We will build a CRT for the family, and then we'll look at the results the resulting cash flows, how it worked for the family, and if we have some time at the end, we will compare that to what we call a non-optimize or knee-jerk CRT

 

before we jump in, just to give

 

some a quick overview of our background.  What makes us well, CRT experts for several of us here at CRT. Experts we spent our entire professional lives working with charitable remainder trusts.

 

personally, in the early to mid-2000s. While still in school, and then, when I was fresh out of school, I was tasked with developing a secondary market for income interest in charitable remainder trusts. That's a topic for another day. Another webinar, but at a high level, the income interest in a CRT is a capital asset.

 

and just like other capital assets, it can be bought and sold, donated to charity, used to create a new CRT with different beneficiaries, and this has always been where I've worked the most within the CRT space what we call secondary planning CRT, secondary planning.

 

reviewing, existing and

 

helping the income beneficiary sell gift and roll over their income interest.

 

and what that's meant and why it's relevant here is we've reviewed a lot of over the years. At last Count January. The team here had looked at over 9,000 over the last 20 years.

 

and in doing so we've developed pretty specialized experience in CRT design and when we you look at that many, you're going to see the good, the bad, and the ugly when it comes to the design of those  alongside the situation that the donor the family is in with respect to the CRT pretty deep in the life cycles.

 

and we've turned that into a service line. Here at CRT. Experts helping advisors ensure that their or clients are implementing are taking advantage of the wide range of flexibility under 6, 6, 4, section 6, 6, 4, then turn a revenue code.

 

You see the 3 main services up on the screen. Importantly, for advisors. We are non-competitive. We do not manage your custody assets. We do not provide tax or legal advice.

 

Okay?

 

At first, I want to just answer the question. So, what does maximum

 

flexibility mean? It's a pretty broad term.

 

Generally, it means incorporating the full range of flexibility that's provided under section 664. The Internal Revenue code

 

are irrevocable, but at the very basic level the client should be given the ability to change the trustee to change the charity. By client we mean donor

 

to change the trustee, change the charity.

 

Change the governing law to make additional contributions in the future. Certainly, those that flexibility should be available, and it usually is

 

where we see the flexibility that's underutilized.

 

Is these 2 areas that we call duration and deferral. And by duration we want, we mean maximizing the term the duration over which the CRT distributes income. But really, what that really means from the family from the donor standpoint, is incorporating as many family members as possible, and in most cases, we want to.

 

Any beneficiary has to be living at the at the CRT's creation. But we want to incorporate all living family members that the donor wants to include when the CRT is created.

 

and second. By deferral, we mean providing for the ability to regulate the distributions from the CRT. And some generations are going to want to defer the income. Some will want it. And so, we want to provide for that flexibility.

 

So we'll drill on those 2 topics for the rest of the webinar. But just here at the outset. Just want to address? Why, the flexibility is rarely implemented. In the first place, this whole this whole presentation really raises that question and in our experience there's really 2 reasons for that.

 

Above all, I think just generally we

look at CRT design from the point of view, the property owner, the wealth producer first.

 

and while this.

 

particularly for tax, legal and tax, legal and financial advisors who are on this webinar that would sound like a given.

 

but the reality is, many in existence today were promoted by charities.

 

and when we think about the charity's motivations with respect to the CRT. They're really the inverse of the donors.

 

while the donor probably wants as much income as possible, and for that CRT to distribute for income for as long as possible. The charity wants the opposite. They want as much money as possible as soon as possible.

 

so it's natural to assume, and what we've seen is if the charities involved in the creation of the CRT. Many cases, in many cases that CRT is not going to be optimized for the for the taxpayer, for the donor.

 

In other cases.

 

the professionals involved when creating the CRT, while in most cases certainly well intentioned, just didn't have the necessary experience. And we're simply unaware of the full range of flexibility available under section 664.

 

So there's this other. We call it the knee jerk. CRT, it's sort of this natural tendency, right? I mean, you know, our brains are hardwired to prefer information that aligns with what we already know.

 

And so often, when

 

client has appreciated property.

 

they don't want to pay the tax, they want to diversify it.

 

They're not just ready to unload that asset to charity. Set up a CRT for the husband and wife and then it'll pay out to the, you know, Charity, Alma Mater, whatever.

 

And there's really not. We need to go beyond that and think, well, what if we want to include children? And what if we want to include some of some of the ability to defer income and things like that? So it's what we call the knee jerk sort of the status quo CRT. But whatever the reason, you know, the end result is the same, and that is flexibility. That the donor

 

in many cases would have chosen to include had they been made aware of the opportunity to do so, is not utilized. And that's what really what it comes down to, you'll put the full menu of options in front of the client so they can pick and choose the features that they want included or not included in their CRT. If the client chooses not to implement all the flexibility. That's fine.

 

The point is, they've been made aware of it, you know they made the choice is the

 

as the late Steve Jobs said, you know, how does someone know what they want if they've never even seen it. And that's really the point here. Just making sure clients are aware of the menu of options.

 

So let's talk first about duration.

 

so in general, the goal with duration with respect to duration, should be to include as many living family members as possible, and to extend the expected duration of the CRT. As long as possible.

 

If given, the choice, most donors will give up some upfront deduction. Now, if we're maximizing the duration. We're minimizing the charitable tax deduction we receive. The donor receives when they establish the CRT that deductions based on what's expected to go to charity.

 

And so, if we're maximizing the duration and and the for the income beneficiaries that's going to minimize that that upfront, charitable deduction. But in our experience, most clients would be happy to give that up in exchange for including their heirs as income beneficiaries of the CRT.

 

Yet they just aren't made aware of the ability to do so again. That knee jerk, CRT, husband, and wife, and then then the charity I mean,

 

I can't tell you how many times we've had an older couple with the CRT. Ask us, can I add my kids to my CRT's income beneficiaries?

 

We can't do that, of course. But you know we were seeing.

 

we're hearing this request so frequently in the in the late 2,000s. That that's what spurred us to develop this Rollover technique where we can't just put your kids on the CRT, that but what we can, we know that your interest in your CRT, that's a capital asset. We know that there's that can be monetized on a secondary market. So let's create a new CRT

 

and then use your interest in in your existing CRT to fund and monetize that new CRT.

 

But in many of those cases there wouldn't be a need for the rollover if the client had had added their heirs. In the first place.

 

Now.

 

There’s always in it this inherent combination of a CRT.

 

You have an irrevocable trust, on one hand, in a very long duration.

 

We don't have a crystal ball, obviously. So there are just in many cases when we're brought in a deeper in the life cycle of a CRT. Where there's a misalignment between the client situation today and this irrevocable, irrevocable terms of the trust they created 20 or30 years ago

 

that was unforeseen. There's no way anyone could have predicted it. But in other cases, had that client been made aware of some of this flexibility they would have included it.

 

So, let's talk about how, how we maximize the duration.

 

You know ultimately what we're up against when it comes to when it comes to this that maximizes the duration is the 10% remainder test.

 

So that is, when I set up a CRT, the value that the IRS projects will go to charity

 

must be equal to at least 10% of the value on a present value basis of the value of the property that I donate to the CRT.

 

So, the 2 key factors here are the ages of the income beneficiaries and the payout rate of the trust.

 

So, to maximize duration and the number of income beneficiaries we're usually going to set the CRT's payout rate at 5%, which is the minimum required rate.

 

Secondly, we're going to use. We're going to use what we call the life plus term or lives plus term

 

structure.

 

And this is.

 

it's always surprising even as we get, we're talking with real, really sophisticated

 

advisors, the confusion around.

 

how? How can a unit trust period be structured?

 

In many cases it's the assumption is. So, if we look at you can see up on the screen the the section of a 6, 6, 4. Where this is. This is stipulated, says, at CRT. Term

 

may not extend beyond either the life or lives of a named individual or individuals, or a term of no more than 20 years. This does not mean there are only 2 choices, life or term.

 

So we can structure a CRT so that it pays the life or lives of the initial beneficiaries

 

follow by payments to successor beneficiaries for the shorter of a term of years not to exceed 20 years, and the life of those successor. Term beneficiaries.

 

So as long as the trust is worded properly, we can move to this life, plus live joint lives plus term structure. Yes, the trust cannot last beyond the lives in being at the date the CRT is created.

 

But we are not running afoul that requirement. If we're if we're structuring this appropriately.

 

So not only are, as I mentioned, so we've, you know, even very sophisticated advisors are unaware of just the ability to go life plus term, or really how it works. Literally, the people who write the software. So anytime that we're looking at that 10% test, or we're calculating a charitable deduction for a client who's establishing a CRT, or if they give their interest to charity, we're calculating the value. The income interest for the deduction.

 

We need software. So, we're using one of several different versions of software. And we're using the current 75, 20, section 75 20 rate from the IRS to value the interest.

 

Now, there are many versions of software out well, not many. There are several versions of software that we've had in the past, where they did not even include this CRT structure, the life plus term.

 

We have 2 versions of software we use at CRT experts, one of a screen grab from one of them up here in the screen. This one does include life plus term.

 

But it's limited to. It's limiting the number of lives to 2.

 

And that didn't make sense to us. We, you know, the the code does not expressly limit explicitly limit

 

limited to 2 lives. We know we have to pass the 10% test

 

but if we can pass that with 4 lives. There's no reason we couldn't move to more than 2 lives. So that's the reason we have a second version of software which will calculate we'll run the numbers for more than 2 lives, plus a term, and we'll see that later in the later in the presentation.

 

So the Jones family. So the second point and final point on duration here is in in some cases we're going to have to use multiple up to include all the family members and to maximize the duration.

 

So if we're looking at the Jones family, we have Stan and Peggy, and then they have 3 children, Lisa, Larry, and John.

 

all are married with children, and so if we're creating a CRT for Stan and Peggy, the goal is usually

 

include as many of these family members as possible to do that. We can't use one CRT, what we're going to do in this scenario

 

is we're going to have 3 and each CRT will be structured for a different family unit, each child, their spouse and their and their kids, the Stan and Peggy's grandchildren.

 

So, the way that Stan and Peggy will be the initial income and lifetime income beneficiary of each of these. Then the child. Each child and their spouse will be the successor lifetime income beneficiaries. And then for the grandchildren. That's where we're going to move to the term.

 

and we're limited to 20 years on that term. But as we'll see later, when we look at the specific terms, we're not quite able to get to 20.

 

on any of these, and so on. Lisa's. Who's the oldest daughter? Who's the oldest child? We're almost getting there, and then we'll see with Larry and John, where I think, at 13, 14, 15, somewhere in there, in term of that successor term, what the software allows us to do easy charitable. The software allows us to do is get very specific with maximizing the term

 

for that third generation, I mean down to the day. It's as we'll see. So

 

We’re again. We know we have to pass that 10% test. But when we, when we're establishing the trust, we want to take that that successor term as close as we can or as far out as we can without failing that test. And we'll see how the numbers look later in the presentation.

 

Okay on to deferral. In. In many cases the donor. So, Stan and Peggy, in our example.

 

The donor is looking to, of course, number one, sell and diversify, appreciate a property without paying the tax. That's

 

the driver behind

 

should be, behind all. The creation of the CRT is to defer capital gains tax on the sale of appreciated property. That's what's driving the decision to create a CRT. But in many cases the donor, Stan and Peggy, are not interested necessarily in after that, maximizing their own income. They're looking at their children, their grandchildren, their heirs.

 

In some cases the the knee jerk might be okay. We'll just, you know, create the CRT, and then put your kids on as the initial income beneficiaries.

 

We don't want to do that. And the reason is because we can structure a CRT, so that if Stan and Peggy don't want any income.

 

they can defer the income, allow their investment advisor to manage those assets, to grow all those assets tax free

 

and in the end give their children and their grandchildren a much larger income stream, because you've super charged it effectively upfront. You've put that trust into deferral allowed for this upfront deferral period, where everything's just growing tax free before it begins to distribute income to their heirs.

 

So to do that we're going to. We're going to use a type of CRT called a net income with makeup charitable remainder unitrust. It's often called a NIMCRUT.

 

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00:20:53.180 --> 00:21:04.470

 Many of you are probably, I'm sure, aware of NIMCRUTs. It's the specific structure around that NIMCRUT that's going to give us the true ability to for pure deferral.

 

But first let's talk about the NIMCRUT itself briefly, and then we'll talk about how we how we control for that trust accounting income. So a NIMCRUT net income with makeup CRUT

 

will distribute the lesser of the stated payout rate to 5% in our example and trust accounting income.

 

So, there's this income exception. With the NIMCRUT, where it's never required to pay the beneficiaries or beneficiary

 

more than its income.

 

So if it doesn't have income, if we can control that trust accounting income, nothing has to be distributed.

 

and we have this makeup provision that enables us to pay any unpaid or deferred amounts in future years, so that those that combination, the income exception and makeup provision in a NIMCRUT

 

are what we're going to use to control the trust and accounting income and thus the distributions to the income beneficiaries.

 

the key we'll look at the deferral technique next. But the key is this is all centered around. Trust accounting income.

 

Trust accounting income or trust income. It's a cash concept.

 

And what that means is that the trust will not have income until it has a cash receipt.

 

So that's we're going to look at these 3 techniques, the 3 most popular techniques for providing this deferral ability to defer income.

 

But each of them is working the same way. It's using what's often called a container.

 

to house the NIMCRUT investments.

 

and then that container. Whether it's a annuity, a partnership, or an Llc

 

will distribute cash to the NIMCRUT

 

when income is desired, and that receipt of cash is what's is what's triggering the trust accounting income.

 

So with a plain vanilla CRT. So let's first think about a a or a NIMCRUT with that doesn't have any structure for deferral, so that that would mean the Nim Crut would just invest in a mixed portfolio of stocks, bonds, and funds, and then any interest dividends or or realize gain would have to be to

 

distributed as it's triggered.

 

So we don't want that.

 

So what we need is again, it's often called a container to hold the investments of the of the NIMCRUT

So that way until we distribute cash from that container to the NIMCRUT. We don't have trust accounting income that has to be distributed so the interest dividends or realize gain that would need to be distributed if the NIMCRUT own the assets directly

 

those are still incurred. But the trust accounting income isn't triggered until we have these cash distributions. That’s going to be the case. That that overall structure is going to be the case with these 3 techniques we'll talk about

 

but there's a couple of disadvantage to the first 2 techniques. And that's what leads us to the single number,LLC. Being, in in our opinion, the optimal structure here, and we'll see why

 

so first is using a variable annuity.

 

the NIMCRUT can purchase a variable annuity.

 

and that annuity will then in turn invest in in a variety of funds and assets.

 

and until there's a distribution from the annuity

 

to the CRT.

 

There's no trust accounting income.

 

so that annuity can grow over time.

 

and all of that defer gain all that growth to the extent that the makeup account is is is, if if the trust is growing at 7 and the payout rate is 5, you're going to have more growth there than what can be distributed. Because you can only distribute up to the accumulated efficiency that makeup.

 

But the general idea is, invest the CRT in a variable annuity, that annuity grows over time as cash is desired or distributions are desired. Annuity can make cash distributions to the to the NIMCRUT

 

that works just fine. The drawback, of course, of an annuity is that all the income flowing from annuity is taxpayers ordinary income, so you can build up a lot of growth and deferred gain there that you can take

 

the beneficiaries can take. But it's all going to be ordinary income.

 

So to get around that

 

taxation drawback, the ordinary income drawback?

 

In many cases the NIMCRUT will hold its assets in a partnership.

 

So same concept. The assets are in the partnership.

 

The partnership can be invested, interest dividends realized gain, that's all. It's flow through. But it's a flow through to the NIMCRUT tax exempt environment.

 

So there's no tax owed that there it would. It is tracked on the CRT's tax. Return that the 5227 in the accounting tiers. But of course, the key. We're not triggering trust accounting income.

 

So the NIMCRUT works well. It gets us around the ordinary income drawback with the with the annuity. The disadvantage with the partnership is we need 2 partners. And we need to file a separate tax return. So now we've got a file 1065,

 

and issue the K1 to the CRT. Thus, complicating the administration of the NIMCRUT.

 

So to get around that limitation

 

we're going to use a single member. LLC, so most States now permit the formulation formation of a single member, LLC. Including Delaware, which is where we will. Typically, the trust will typically be under Delaware law. We'll talk about why.

 

So it's the same concept as partnership, except now, because of the LLC. Is a disregarded identity. We don't have that extra tax return, complicating the administration of the NIMCRUT. So it's very similar overall in the result. We can get capital gain unlike the annuity. But we're able to simplify the administration by using the single member LLC.

 

So, to illustrate this

 

before we jump into just some recommendations, and then we'll look at the Jones family and build them a CRT.

 

Just to illustrate this.

 

First step here is we have appreciated property that's going into the going into the structure. So in our case, we'll look at Stan and Peggy Jones, they have appreciated real estate, it could be appreciated. Stock, closely held stock, public stock, any capital asset? That's appreciated. Is usually, as long as the client doesn't need the money from selling. That, personally is is a good candidate for CRT,

 

so that that appreciated property is going into the Cr. In into the NIMCRUT LLC. Structure

 

we will usually recommend well, almost always would recommend a single member LLC. But not having the donor, as the manager of the LLC. So we recommend a single-member manager, managed LLC. And not having the donor

 

as the as the manager of the LLC.

 

The reason why is, is pretty simple to see it's the so what's triggering the trust accounting income, the cast distributions from the LLC.

 

So these are these are often called spicet trusts or faucet, you know. So the concept is that manager, by making cash distributions or not to the to the NIMCRUT, is able to turn that income stream on and off.

 

So we would not recommend. Now we see this

 

 

 frequently, and I've not aware of any issues or it creating any problems. It's easy to see the potential problem right? We have someone controlling their own income.

 

So we would always recommend not putting a disqualified person on. That's usually in practice. It's usually the donors CPA, financial advisor or attorney, but we would not recommend putting the donor on as the manager of that LLC.

 

so as those distributions are made to the NIMCRUT, the trustee which can be the donor, there's no problem there. The trustee will allocate that income or allocate that cash receipts to income trust accounting income. And then it's flowed out to the to the income beneficiaries. So that's what we've talked about, but just an illustration. To demonstrate how this works from a from a visual standpoint.

 

So just to run through some best practices here are, in our view, our recommendations.

 

We recommend Delaware law.

 

You know, with the revised uniform Principle Income Act. This structure with an NIMCRUT is.

 

is is possible in states that defer to that that act. But in Delaware there's some, and we'll see them here in a couple of slides. There's some advantages just from the flexibility standpoint. There's a carve out for NIMCRUTs.

 

But again, in interest of maximizing flexibility for the client, we want to give them the or the trustee, the ability to change the State law.

 

no reason not to give them that that that power, but we initially would. Would always recommend the controlling lobby in Delaware.

 

one thing that's very important is, you know, we always we always. And this is from for the drafter, for all, for all our attorneys out there. We always want to place the desired accounting rules in the text of the trust instrument. So we're not going to rely on the principal income, we want to

 

explicitly state in the trust instrument. In this case, how income is defined?

 

And so there's a few key points. If we're using Delaware law. We want to incorporate by reference to Delaware Principal and Income Act.

 

We want to allocate, to trust principle. All pre contribution gains the appreciated properties going into the CRT

 

and the Jones example, you've got a 12 million dollar real estate position with basis of 2 million that 10 million dollar. Pre-contribution gain

 

is, can should not be allocated to income, that is, principal.

 

Any post contribution gain, though any gain beyond that 12. The the value of the property that's donated should be allocated to income.

 

And then and that's the example up here on the screen. You know, we want to explicitly write into the trust instrument. Regarding distributions received on account of a trust investment and entity. We want those to be allocated to income as well.

 

So if we look at the Delaware Principal and Income Act, and this is what we're incorporating by a reference, you can see a couple. We've underlined a couple of these the key parts here. You can see

 

it says if the trust instrument adopts the provision of this section by reference. So we've done that where we're defining income, an increase in the value. The following investments, owned by a CRUT described in section 664 c3. That is a NIMCRUT. Specifically.

 

we have been that income limitation is distributable as income.

 

and one of those, one of those you see, the 1, 2, 3, 4, 5, 6, number 5. We can see. That's an interest in a partnership or an LLC.

 

And then down and B, we see that the increase in value of an investment described in A

 

is available for distribution only when the trustee receives cash

 

account of the investment. So we can't distribute property. We can't distribute in kind

 

to the NIMCRU t that's principal. We need cast distributions from in our case an LLC. To the CRT to trigger that trust, accounting income.

 

Finally, just give that trustee the power to allocate between principal and income. This is in most we see this in most NIMCRUT trust instruments, regardless of the governing law. We always want to see that as well.

 

Okay, so let's look here at the Jones family. Stan we've talked about. We've seen kind of the family layout. We'll see the ages here in a minute. But Stan is he's a successful real estate developer, and he has 12 million dollars of appreciated real estate, his goal

 

and his wife Peggy. They want to diversify that position. They don't want to pay any tax.

 

Like many, this is a very typical client profile. That first generation is not looking for a lot of income or any themselves. So they want to minimize their own taxable income while maximizing the future income that's available to their children and grandchildren.

 

So we saw the family earlier. We can see the ages here.

 

And so, what? again; we're going to use 3 CRTs

 

one for each family unit. We've got 12 million. It's usually just going to be evenly split across those 3. So we've got 3, 4 million dollars, one for each family unit. Now, what we need is that software.

 

we know it's going to go 4 lives on each of these for to stand and Peggy, and then for each child and their spouse for lifetimes, and then we will go to the grand, the grandchildren for a a, the shorter of their lives, or a a term with a maximum of 20 years. So what we need to figure out is, how do to maximize duration? We want that term out as far as we can.

 

So to do that. We use easy charitable. If any of you know Lee Hoffman, this is his software.

 

So this is this is, going to allow us. Unlike, we saw the software earlier. That doesn't allow us to go more than 2 lives plus the term. Well, we want to go 4 lives here, plus the term in each one of these scenarios. And that's what this is going to enable us to do.

 

So we can see. So over to the right. You can see this is the output over here from the software

 

and really, what we're looking at here is, what's that maximum term? So we see here. We're going for life, for life, for life, for life. So we've got 4 lives, Stan, Peggy, their daughter Lisa and her husband. And then we're going to go to the 2 grandchildren.

 

and we want to run this that term out as far as we can. We can't go beyond 20 years. In this case, it's what's creative at this software, you can get it to the day.

 

And so we're here. We're out 19 years, 11 months, and 14 days. We're almost getting up to that maximum term for Lisa. Of course, as the kids get a little bit older or younger. Sorry it's that 10% test you can see down here. See, we're at 10.0 once we're right at that line

 

of meeting that 10% test. And we can see to do that for Larry's family. We're at 16 years, 4 months, 14 days.

 

and then

 

for John, who's the youngest for for his family, for his 2 daughters that successor term we're at 13 years, 5 months, 14 days.

 

So that's how we're maximizing the duration.

 

So before we look at the cash flows. Let's just think about this from. Okay, so what have we done here?

 

For Stan and Peggy? We have diversified that real estate position with 0 tax.

 

They've picked up a 1.2 million dollar charitable tax deduction, 10% of the 12 million.

 

They've created income streams for their children and grandchildren.

 

They always do have that safety net, if they, won't they? You know in these situations, you know the chances that Stan and Peggy will ever need.

 

Income from the trust is almost 0, but it's there as that when the trust is put into deferral.

 

they can always tap that makeup account should they desire that income?

 

But, more importantly, they are creating sizable income streams for their children.

 

And then, finally, from a charitable standpoint. They're leaving their grandchildren, and as we'll see their great grandchildren if their children have, or if their grandchildren have children, a a meaningful amount of charitable assets. So in most cases, what we see

 

is the ultimate, charitable beneficiary is a donor advise fund.

 

So in most cases we would see one. So we have those 3. Each family would have a donor advise fund where the

 

because it's a term for those grandkids. In most cases, if you look at how old those grandchildren are expected to be when that term is up, you know they still have. You know they're going to live well beyond that.

 

So we're giving them now the ability. Yep, we're that. CRT's got to go to charity now. They've asked us got to go to Charity, but it's going to go to a donor advise fund where they and their children can give the money away, which would be the great grandchildren for for Stan and Peggy.

 

when we structure for maximum duration. But really the flexibility to defer income, it creates many potential scenarios, because we can, we've got the ability to regulate the income stream. So let's look at one. And this is what Stan and Peggy think is most likely they'll defer all income.

 

Lisa and her spouse, Larry and his spouse will take the income.

 

John is in a different financial situation, is likely to defer the income, and then the grandchildren will take all the income.

 

So let's look at this from a cash flow standpoint.

 

You can see we have each CRT, we have Lisa's Larry's in the middle, John's there on the right.

 

there's 4 million dollars going to into each CRT,

 

and in the first.

 

during the green phase. That's when Stan and Peg, you're the lifetime income beneficiaries. They have a 12-year joint life expectancy. Trust is in deferral.

 

so that allows her investment advisor. If this is growing at 5% over 12 years to get that up to north of 7 million

 

at that point.

 

when Stan and Peggy, the last of Stan and Peggy Pass. That's when the children and their spouses will step in as income beneficiaries for their lifetimes, and we see lease, and her husband taking the income, Larry and his wife taking the income, and then John and his wife continuing to defer the income. So that third trust is going to be in deferral over those first 2 generations.

 

You can see the and we'll look at the individual family outcomes here momentarily. But you can see the outcome. There in the at the top.

 

You can see down here. This is Lisa's. Her life expectancy is a little bit shorter than Larry is a little bit shorter than John's, but they're all ending at the same time for John. We didn't have as long as a term possible, and maximizing in in passing the 10% test because he, he and his wife have a longer joint life expectancy over here than Lisa does.

 

So let's look at what we've done here. So for Lisa's family we have 4 million dollars going in.

 

Lisa and her husband took out about 7.9 million.

 

Their children, Santa Peggy's grandchildren, about 7.2 million.

 

At the end of that term

 

the remaining assets 7.2 million go into a donor advise fund

 

at that point Skylar and Kyle, the grandchildren probably going to be at the age where they would have children of their own.

 

So the entire family, the grandchildren, and great grandchildren can be the charitable advisors with respect to that staff, and give those charitable assets away.

 

Similar results here, for Larry. Larry had Larry and his wife had a little bit longer life expectancy than Lisa's. We see a little bit more income for them, and a little bit less income for the grandchildren. And again, we've got about 7.2 million dollars going into that family donor advise fund.

 

And then for John

 

Robert. He and his wife

 

elected to defer the income, so that that their name Crut was in deferral for 2 generations, and that just creates a whole lot more income, of course, because you have a much higher asset base for their for their children. Santa Peggy's grandchildren. To receive income from now. One thing to note is we in these scenarios we never tap the makeup account. So

 

in that makeup account is growing over time. All that deferred gain is growing.

 

When we started taking income we assumed that they took it at the 5% payout rate.

 

But with the with the NIMCRUT with the makeup account. There's a much larger available part of it, part of in potential income. Each income beneficiary can take.

 

Of course, the extent that they take, that it would reduce the trust value, and there would be less income in the future. But lots of lots of flexibility there. And we've we're just again. We're just modeling what we think would be sort of that base scenario.

 

So in total, we can see.

 

Got that 12 million dollars of appreciated property.

 

And we've created almost 50 million dollars of income for the kids and grandkids and about 43 million of charitable assets that the grandkids and great grandkids will give away

 

so pretty powerful if the client's able to withstand that deferral period. In many cases, indeed, they'd want to. They don't want taxable income. It's pretty powerful what the CRT can do.

 

If it's structured properly, if we're maximizing the number of beneficiaries family members that are receiving income

 

and how long that CRT is paying out. And we're giving

 

any income beneficiary the flexibility and to defer income and by controlling the the timing of of the trust accounting income.

 

So just and we're we're just about out of time. But so just so we talked about the knee. Jerk. CRT, right? So what would happen in a lot of cases? What would happen here is, we'd say, or we've seen. Okay, well, we've got this family. You this family. Remember the chart. Okay, well, let's put Stan. Let's set up a CRT. Then for Stan, Peggy

 

and the 3 children.

 

In that case, you know, let's. And still let's assume they put that trust into deferral stand. And, Peggy do

 

but instead of moving to that life plus term structure. We're limited only to stamp it till 5 lives which would pass. We can see we took the distribution rate up to the maximum, which would be about 6.8% given everyone's ages.

 

And let's see how that would compare. So there, you can see, there's about 31 million dollars of income that's distributed to the children, Stan and Peggy. They're still deferring the capital gain. They diversify the asset. They don't have any taxable income, but you can see that there's no income to the children

 

when we compare this to what we modeled

 

or the grandchildren. And okay, well, there's 31 million to the 3 3 children versus 17 in our modeled scenario.

 

But remember.

 

John and his wife deferred income.

 

So if we and that's I mean, it's just getting to. The beauty of the flexibility here is. Let's say that John and his wife decided to take the income that would lower the income that goes to the grandchildren, of course, because their children receive less, but it makes it more apples to apples. So if we introduce that

 

if we look at that flexibility. We can get back to just about the same amount of income to the children.

 

But then we've got 17 million 18 million dollars of income to the grandchildren versus 0. So just an idea here of when we talk about knee jerk status quo. It's not

 

you know it's not meant to be a negative, but it's we really want to think about. If

 

the trust is irrevocable.

 

But the service Treasury has given us a a fair amount of flexibility under 6, 6, 4, that we can use to truly maximize the ultimate value to the family.

 

And that's what a properly structured CRT can do.

 

So hopefully, this has been helpful for everyone.

 

 

 We're keeping it right. Well, just a couple of minutes passed. So hopefully, we will try to get everyone out of here on time. Obviously, if you have any questions about anything we've gone over here today. My contact information is up on the screen. Just give us a call. Shoot me an email. Be happy to answer any questions you have.

 

And we will, as I mentioned at the outset, make sure to send around a link to watch or re-watch the webinar and you can go to any parts that might have been of particular interest. But please do not hesitate to reach out. Thank you again for joining us. I hope it's been informative, and please have a great day.

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