CRAT, CRUT, CLAT, CLUT, GRIT, GRAT and GRUT…What Does It All Mean?

No area of law practice has created more acronyms than estate planning.  The following is a brief description of these irrevocable trusts.

CRAT – Charitable Remainder Annuity Trust – A trust where payments are made to an income beneficiary for a set term with the remainder going to charity.  The income beneficiary, a private person(s), will receive at least an annual distribution of not less than five percent (5%) nor more than fifty percent (50%) of the initial net fair market value of the trust.  The payments to the income beneficiary are a set amount.

CRUT – Charitable Remainder Unitrust – A trust where payments are made to an income beneficiary for a set term with the remainder going to charity.  Instead of a fixed sum, the income beneficiary receives a fixed percentage of not less than five percent (5%) nor more than fifty percent (50%) of the initial net fair market value of the trust.  The trust must be valued annually.

CLAT – Charitable Lead Annuity Trust – The reverse of a CRAT, where the charitable interest comes first and the charity gets the income for a set term and the grantor's heirs receive the remainder interest after the expiration of the term.

CLUT – Charitable Lead Unitrust – The reverse of a CRUT, where the charitable interest comes first and the charity gets the income for a set term and the grantor's heirs receive the remainder interest after the expiration of the term.

GRIT – Grantor Retained Interest Trust - An irrevocable gifting trust for high net worth individuals.  There is a transfer of property to a trust for a specified period of years.  The Grantor retains a qualified annuity interest or unitrust interest in the trust.  When the trust term ends, the trust terminates and all of the assets are distributed to the beneficiaries.

GRAT – Grantor Retained Annuity Trust - An irrevocable split interest trust in which the grantor retains the right to receive an annuity with a set amount for a term of years with the balance remaining at the end going to designated beneficiaries.

GRUT – Grantor Retained Unitrust - the right to receive annual amounts that are a fixed percentage of the FMV of the trust determined annually.

A Charitable Alternative to Cashing in Your Life Insurance

In our prior post, we addressed the possibility of a life settlement as an alternative to taking the cash surrender value of an unneeded life insurance policy.  Another alternative is gifting the policy to a charity and taking an income tax charitable deduction.  The charity becomes the beneficiary of the policy and the ownership is transferred to the charity as well.

If you do not need an income tax charitable deduction and you do not want to part with the ownership of the policy, you can simply designate the charity as the beneficiary of the policy.  Your estate will receive an estate tax charitable deduction for the death benefit passing to the charity.

The Life Settlement Alternative

If a life insurance policy is no longer needed, then most people elect to take the cash surrender value.

An alternative is to sell the policy to an institution through a life settlement.  Life settlement companies will be interested in the type of policy, the amount of the policy, and the insured’s life expectancy.  If the circumstances are good, the policy can be sold for many times over the cash surrender value.

Ohio Charitable Trusts Need to be Registered

All charitable trusts established or active in Ohio are required to register with the Ohio Attorney General’s Charitable Law Section.  The registration form is filed with a copy of the instrument creating the charitable organization and the IRS letter granting exempt status.

In addition to the registration requirement, the charity must file an annual report, attaching a copy of IRS Form 990.  The filing deadline is the same date as the Form 990 filing deadline, i.e., the fifteenth day of the fifth month following the close of the fiscal year end.  If the Form 990 is on extension, the registration deadline is automatically extended.  One does not want to file the financial report late.  The Attorney General assesses a $200 late fee.

529 Savings Plan Briefing

On the heels of the recent high ranking of the Ohio CollegeAdvantage 529 Savings Plan, Investment News is reporting that Jacqueline Williams, the executive director of the Ohio Tuition Trust Authority is leaving to become director of New America Foundation’s College Savings Initiative, effective June 1.  There is no word yet on who might take her place.

Back in the "good news" category, PR Newswire reports that according to Savingforcollege.com's newest 529 Fee Comparison Study, the Ohio CollegeAdvantage 529 Savings Plan is the lowest-cost, nationally-sold 529 plan.

Skip your IRA minimum distribution for 2009

Is your IRA suffering due to the stock market?  You can skip taking a required minimum distribution (RMD) for 2009. 

Investors over the age of 70½ are normally required to take an annual minimum distribution amount from their IRA’s.  The required minimum distribution amount is calculated by using a life expectancy factor published by the IRS.

Federal law permits skipping the RMD for 2009.

When a Restricted Gift is Not a Restricted Gift

As universities feel the pinch of the recession, many of them are looking for sources of money to cover operational expenses.  One important source is endowments.  Universities love unrestricted gifts, because the money is theirs to use as needed to pay faculty salaries, financial aid, and other expenses.  The reality is that most significant endowments are for a restricted purpose.  For example, maybe the donor hopes that the money will be used to bring prominent speakers to the university.  It might be that the donor enjoyed his experience at the college’s radio station and wanted to see it continue.  Perhaps the donor gave expensive works of art for the university to display for future generations.  By the way, these are real-life examples.  See New Unrest on Campus as Donors Rebel, Wall Street Journal.

The donor’s intent is almost always expressed in writing, so what if the university needs it for another purpose?  Should a university be able to use a restricted gift for an unrestricted purpose, or worse, should a university be able to sell the works of art or the radio station?  If the university is in dire financial straits, it may have no choice; however, it should try to honor its benefactor’s intent.  Donor unrest is never a good thing.  You know the saying, “you should not bite the hand that feeds you”.

Rankings of Best and Worst 529 Savings Plans

Investors in Ohio’s CollegeAdvantage 529 savings plans have something to feel good about.  The Morningstar investment research firm ranked the savings plan as the best in its rankings released today.  The research firm liked the fact that the Ohio Tuition Trust Authority not only created the plan, but it manages it as well.  Both low fees and a variety of investment options, including age-based options, were important factors in Morningstar’s favorable ranking.

The news for the brokerage sold Ohio Putnam CollegeAdvantage fund was not nearly as good.  Morningstar ranked the Putnam fund “at the polar opposite end of the spectrum.”  The research firm did not like the fund’s heavy exposure to Putnam Funds and recommends avoiding the plan.

Is The Family Foundation Giving Way to The Donor-Advised Fund?

A charitable family foundation can be much more involved than a donor-advised fund.  It is important to understand a client’s expectations before recommending one or the other.  A recent Wall Street Journal article, Family Charities Shift Assets to Donor Funds, provides a few recent examples where foundations were dissolved in favor of donor-advised funds.  In reading the examples provided, the underlying theme seemed to be that the donor-advised fund was easier and much less time-consuming.

 The Columbus Foundation’s website discusses the advantages of the donor-advised fund versus the private foundation.  If you look at the list of these advantages, it is clear why the donor-advised fund is easier to establish.  Additionally, one nice thing about the donor-advised fund is that it can be set up with as little as $10,000.  It is not cost-effective to set up a family foundation with that amount.

Quotes of the Month

“We need to simplify a monstrous tax code that is far too complicated for most Americans to understand, but just complicated enough for the insiders who know how to game the system.” – President Barack Obama’s comments in Washington on April 15, 2009.

 “There is no justification for the countless billions that citizens will have to pony up this tax season to fund liberalism’s reckless abuse of the federal treasury.” – Statement issued by Americans for Tax Reform, during several anti-tax protests across the U.S.

 “We need to end the tax breaks for the wealthiest 2 percent of Americans, so that folks like me are paying the same rates that the wealthiest 2 percent of Americans paid when Bill Clinton was president.”  President Obama.

 See Bloomberg article, Obama Uses Tax Deadline Day to Vow Revamp of System, for full story.

Intentionally Defective Grantor Trusts

What if you paid a significant amount of money to buy something and it was defective?  In one instance, you would be getting exactly what you bargained for.  The intentionally defective grantor trust, sometimes referred to as a grantor defective trust (GDT), is an estate planning tool for the wealthy.

Normally when a grantor establishes a trust for other beneficiaries, the grantor wants to avoid being taxed on the trusts income; however, in the case of the GDT, the grantor intends to pay the tax on the trust’s income.

The GDT is an irrevocable trust.  The trust is set up to accomplish the following 3 goals.  First, the grantor wants to make completed gifts to the trust for gift tax purposes.  Next, the grantor wants to remove the trust assets from the grantor’s estate for estate tax purposes.  Lastly, the grantor wants to intentionally set the trust up in a manner where the grantor continues to pay the income taxes on the assets (in effect making additional gifts).

A Wall Street Journal article, Unusual Trusts Gain Appeal in Unusual Time, reports that this strategy currently has appeal due to the depreciation of many assets and the historically low interest rates.  The article provides an example where a married couple set up a GDT and loaned the trust money to buy their office building.  The couple will receive interest payments for 9 years.

Today’s low interest rates mean that the trust repays the couple less, further benefitting the heirs.  When the loan is repaid, the asset’s appreciation should pass to the heirs both estate and gift tax-free.

The Ohio Supreme Court Rules Unclaimed Funds + Interest

The Columbus Dispatch reported this morning that the Ohio Supreme Court unanimously ruled that The Ohio Department of Commerce, Division of Unclaimed Funds is not permitted to withhold interest on unclaimed funds accounts.

The Department of Commerce has been withholding interest for the past 18 years.  In 1991, the Ohio legislature ended the practice of paying interest and added a 5% administrative fee.

The Ohio Supreme Court summary indicates that the withholding of interest is a violation of property rights.  The department currently holds approximately $1.2 billion in unclaimed funds.

U.S. Senate Proposes Lowering the Estate Tax

There are several articles this morning reporting that the Senate passed an amendment to lower the estate tax. The amendment raises the estate tax exemption amount to $5 million ($10 million for a married couple) and lowers the maximum tax rate to 35%. While this is non-binding legislation, it does set the tone.

Here are links to some of the articles:

The Hill.com

The New York Times

The Associated Press

Fox News

The Wall Street Journal (subscription required)