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Thursday July 18, 2024

Case of the Week

The Values-Based Charitable Remainder Trust


Stacy Powers, age 40, has lived a very privileged life as the only daughter of Dr. and Mrs. Powers. When Stacy was born, it was a dream come true for the Powers. The Powers were very affluent and, during Stacy's childhood, the Powers smothered her with love, affection, time and money. Stacy soon 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. Throughout her adult life, Stacy continued on this path. While she was a good person with a good heart, the Powers felt that Stacy did not mature into a financially responsible 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 outright because they feared that she would simply spend it quickly. Instead, the Powers wanted an estate plan that provided retirement security, fostered financial responsibility and encouraged a love of philanthropy.


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


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" would be a FLIP CRUT. A FLIP CRUT pays the lesser of the actual net income produced by the assets in the trust or the trust's chosen payout rate until a "trigger event." Upon the occurrence of the trust's trigger event (which could be a set date in the future or the sale of an asset in the trust), the trust "flips" to a standard CRUT. Starting the next calendar year after the flip, the trust begins paying income at the trust's payout rate, regardless of the trust's net income.

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 remainder beneficiary, the DAF would also be named as a 1% income beneficiary. The FLIP CRUT would pay out 5%, with 4% going to Stacy and 1% going to the DAF. If the trust earned less than 5%, the ratio of the payments would remain the same. As a result, the DAF would receive distributions every year from the FLIP CRUT. (Note that there would not be additional charitable income tax deductions 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. Note that the actual DAF distribution decisions are made solely by the charity where the DAF is funded. However, in most cases, the charity will follow the recommendations of the donor and donor's family. The Powers hope this yearly, active involvement with the DAF and local charities will cultivate new personal relationships and new values for Stacy.

Stacy could also make gifts from the trust principal to the DAF by disclaiming part of her interest in the trust. By doing so, Stacy could provide greater funding to the DAF and enjoy a charitable tax deduction for the value of the gifted income interest. 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 turns 55 (the trigger event). After that point, the FLIP CRUT would turn into a standard CRUT and 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 knowing that they are providing Stacy with an opportunity to grow and mature as an adult. Consequently, the Powers are very pleased with this values-based charitable remainder trust plan.

Published December 16, 2022
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