Another Case Study to Examine

Another Case Study to Examine

Article posted in Charitable Remainder Trust on 28 August 2014| 7 comments
audience: National Publication, Two Hawks Consulting, LLC | last updated: 28 August 2014
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Summary

In this brief article, we seek your knowledge and advice on another tricky estate mess. Read on and reply.

by Randy A. Fox

Recently another colleague called me with yet another example of poor design and poor execution in a large charitable gift case. The call to me was to talk through various options to rescue the elderly couple, who were the income beneficiaries of this plan, or at least to mitigate their situation. We made some progress but the issue is still unresolved.

Here’s the story. Many, years ago, the couple, a successful executive and his wife, established a charitable remainder unitrust to benefit their alma mater and several other charities that they were closely affiliated with. The university was the moving force behind the decision and the 80% beneficiary and trustee of the trust. The trust was a net income trust, the only one I’ve ever seen in my career. The trust was funded with $2 million of appreciated securities originally. Those securities were sold and reinvested for income. Later, the trustee convinced the couple to contribute their home to the trust (after they’d moved out and before it was sold, of course). Now the trust was worth close to $3 million but the couple had little other net worth.

Currently, they live in a senior residential community but the expense absorbs virtually all of their income. In today’s low interest environment, the trust is only able to produce $60,000 annually. All that remains of their other assets has been spent and they only have Social Security income as a buffer. This is a situation where the couple’s benevolence has unintentionally impeded their own peace of mind. The couple believes that if they could get enough cash to buy a condo, their living expenses would drop dramatically and they could exist on less money. They’ve asked us to rescue them from this unfortunate mess.

In our several conversations we have considered a number of options. Our first was to bifurcate the trust and sell the remainder interest in one of the trusts. That would provide the couple with enough after tax cash to purchase their condo but would also reduce their income by half. We’ve also considered some sort of judicial reform in order to apply UPIA to produce higher distributions from the trust. We also found a fixed annuity that could raise the income to a little over 3% but what if interest rates rise in the meantime? There are no easy answers to be found, though there seldom are in situations such as this.

Currently the situation is not completely resolved. I’m resigned to the fact that there is not a miracle to be produced and I can’t fix everything for them. They are still fiercely charitable and steadfastly loyal to their institutions of choice. And we’re still working to improve their lives. Suggestions anyone?

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