Charitable Trust Administration - Part 3

Charitable Trust Administration - Part 3

What advisors need to know about NIMCRUTs
Article posted in Ethics, Charitable Remainder Trust, Practice on 8 May 2014| comments
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By Randy Fox and Daniel Felix

Last time, we discussed trust-planning blind spots and ways to solve complex trust matters. Here, we’ll look at how a very successful and very charitable client established a Net Income with Make-up Charitable Remainder Unitrust (NIMCRUT) for his life and the life of his partner, who was 20 years younger.

Many of the discussions that took place during the creation of the trust revolved around the younger partner’s lack of financial literacy. The trust creator (aka the grantor) wanted to make certain that his partner had access to income regularly and could not deplete the trust principal easily.

The trust functioned for a period of 15 years before the trust creator died. The trust creator had never accessed any income, and the trust had doubled in value twice. The trust creator reviewed his charitable beneficiaries regularly, so that when he died, the charities he still supported would remain in place.

The successor-income beneficiary had not improved his financial skills over the 15 years, however. When the trust creator died, the successor income beneficiary was, for some reason, named the successor trustee. Because this type of trust allows the income beneficiary a chance to “make up” for income that was never distributed, he immediately sought to withdraw the maximum amount possible from the trust—exactly what the trust creator feared would happen. While the trust creator’s advisors eventually talked him out of such a decision, it was only by luck that he didn’t destroy the trust—or himself, for that matter.

A better solution

A more effective solution would have been to name an independent third-party trustee as a successor to the trust creator. Such a trustee could have worked alongside the successor income beneficiary to help him meet his needs AND keep the charitable beneficiaries in mind. Further, he could have helped educate the successor beneficiary about some of the more complex financial matters in this type of trust. Actually, in this case, the income beneficiary died very suddenly, less than a year after he received his first income check. The funds were subsequently distributed to their ultimate charitable beneficiaries. While his death may have prevented further discord, there are better (and more predictable) ways to resolve or prevent issues than the early death of a beneficiary.

Conclusion

As this case study confirms, the devil is in the details, which include technical considerations of estate, tax and charitable law as well as the specifics of the family situation. And that’s just the first stage of planning. It may also be prudent to field-test the trust, both to back test it against the volatility of past financial markets and to test it looking forward at the interplay of the two classes of beneficiaries as well as the various advisors.

As noted, all is not lost if the trust does not sufficiently anticipate the trustees’ challenges in administering the trust. And it may come down to acknowledging the choice: the ounce of prevention or the pound of cure.

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