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Saturday June 23, 2018

Case of the Week

The Values-Based Charitable Remainder Trust

Case:

Stacy Powers is 40 years old and has led an interesting life. She was the only child of a successful couple. After both started their careers, they decided to have a child. During the middle years of their married life, they were delighted to be blessed with a daughter. Stacy was a dream come true for the Powers.

Over the next years of Stacy's life, the Powers smothered Stacy with love, affection, time and money. Stacy became very accustomed to the constant "spoiling" and financial support of her parents. As a result, Stacy possessed little drive and initiative. In fact, her idea of a productive day consisted of shopping trips and hours at the salon. For years, Stacy continued on this path. While she was a good person with a good heart, the Powers felt that Stacy did not develop and mature as an adult.

During a visit with their estate planning attorney, the Powers expressed their concerns about Stacy. The Powers did not want to leave their entire estate to Stacy fearing that she would simply spend it away. Instead, the Powers wanted an estate plan that provided retirement and financial security and a love of philanthropy.

Question:

What planned gift would give Stacy philanthropic involvement? How could this planned gift be structured to provide Stacy with retirement and financial security?

Solution:

After consulting with their attorney, the Powers decided that a customized one-life, 5% charitable remainder unitrust (CRUT) might achieve their objectives. Specifically, the Powers would create the "Stacy Powers Flexible Foundation." This "foundation" is not really a private foundation at all. It is actually a FLIP CRUT.

In an effort to involve Stacy in philanthropy, the charitable beneficiary of the FLIP CRUT would be a Donor Advised Fund (DAF) created in Stacy's name. In addition to being the charitable remainderman, the DAF would also be named as a 1% income beneficiary. As a result, the DAF would receive distributions every year from the FLIP CRUT. (Editor's Note: There is no additional charitable income tax deduction for the 1% income distributions to the DAF each year.)

The DAF would then make distributions each year to local charitable organizations based upon Stacy's recommendation. (Editor's Note: The actual distribution decisions are made solely by the charity where the DAF was funded. However, in most cases, the charity will follow the recommendations of the donor and donor's family.) This yearly, active involvement with the DAF and local charities could cultivate new personal relationships and hopefully even new values for Stacy.

Stacy could also make gifts from the trust principal to the DAF during her life. By doing so, Stacy could provide greater funding to the DAF and also enjoy a charitable tax deduction. (See PLR 9550026.) Lastly, upon Stacy's death, the FLIP CRUT would distribute its principal to the DAF. At that point, Stacy's children could be involved with the future DAF distributions.

The FLIP CRUT would also allow the Powers to meet their financial and retirement goals for Stacy. The FLIP CRUT would be invested for growth until Stacy's 55th birthday—the trigger event. After that point, the FLIP CRUT would provide a steady stream of income for the rest of Stacy's life. With a lifetime 4% payout (plus 1% to the DAF each year for a total payout of 5%) on a very large trust, there would be significant income available for Stacy's retirement years.

While not certain of its success, the Powers feel comfort in knowing that they are providing Stacy with some opportunities to grow and mature as an adult. Consequently, the Powers are very pleased with this values-based charitable remainder trust plan.

Published August 18, 2017
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Milwaukee-Downer Scholarships and Professorships

Some of the many recipients of Milwaukee-Downer scholarships gather for a photo with Carolyn King Stephens M-D'62 and Marlene Crupi-Widen M-D'55 in January 2014 at the annual scholarship luncheon.

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Milwaukee-Downer Class of 1955 Scholarship
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