Charitable Remainder Trust: Control and Expenses

[Abdenour Achab]

If you have donated assets to a Charitable Remainder Trust, and became the trustee of the trust, please share your experience regarding control and ongoing expenses. I am trying to go through a shoulda coulda woulda exercise regarding 2006, so I can make better decisions in the future.

Here is my shoulda coulda woulda: I sold a condo at the top of the bubble, tried and failed to do a 1031 exchange (failed meaning I didn't find a good deal to buy - I did NOT want to just buy any property). Using round figures, the sale prices minus sales cost was $300,000, the basis was $50,000, the profit $250,000, the federal taxes were $50,000, and California state taxes were $25,000. I used what's left to mostly buy promissory notes.

If, instead of selling and paying $75,000 in taxes, I am thinking I could have set up a CRT for, using GUESSED round numbers (GUESSED is the key here - that's where I need people who have actually done it to weigh in), would have had the following expenses:

$5,000 to setup the CRT: I would have wanted to buy promissory notes, so I would have wanted to hire my own attorney, not use the free or cheap services charities offer to would be donors.

$0 expenses for the gifted $30,000 (10%). While the gifted $30,000 was worth something, it's discounted at a much lower discount rate than the return I get on my money. I would have saved more in 2006 job income taxes than what that gifted $30,000 would have costed me.

$30,000 Net Present Value of ongoing trust expenses: assuming $3,000 a year for the administrator, accounting expenses, having to value the promissory notes (and other assets) every year, other expenses I don't know about.

$25,000 Net Present Value of the taxes I would have paid from the Trust income over the years: assuming $2,500 a year in taxes for taxable income from the trust.

So, the above UNEDUCATED guesses tell me that the CRT would have costed me a Net Present Value of $60,000 over its lifetime. Better than the $75,000 I paid in taxes for a straight sale (actually a failed 1031 exchange), but only $15,000 better. That is, if you don't count the value of my time learning and complying with CRT rules, regulations, reporting, etc. And if you don't include the risk of somebody messing up something that will unleash the wrath of the IRS on me.

Then there is asset protection: can you lose the beneficiary interest in a CRT in bankruptcy ?

I did a Google search on CRTs, but the only numerical examples I found are bogus (example: assuming the ongoing expenses are 0, which may be true if you let the charity manage the investment, but not in what I would have done).

If you have done a CRT before, or helped clients do one, please weigh in on the above numbers, and on my current tentative conclusion, which is: if I ever have a million in profit to protect and don't want a 1031, I believe a CRT is definitely worth it. For $500,000 profit, it's probably worth it. For $250,000 profit, as in the above example, I don't know. For $150,000 or less, it's NOT worth it.

Please include numbers in your reply. I found a lot of prose about CRTs on the internet, but I can't make decisions based on prose. I need to see numbers, even if they are hypothetical numbers.

Thanks in advance,

Abdenour