Investing the Assets of a Charitable Remainder Unitrust

Barton J. Bradshaw |

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A charitable remainder trust (CRT) may be structured many different ways, and a number of key issues must be addressed in their design, implementation and management. This article will focus on the role of the financial advisor and the concerns faced by the advisor when investing trust assets in a charitable remainder unitrust (CRUT). Investment volatility can cause problems because the trust has to be revalued and make distributions annually. If the value of the asset is high when it is valued, but falls when a distribution must be made, the trust may be required to distribute principal to cover its payout obligation. This means that the next year the trust investments will have to perform at an even higher level to make up for the reduced asset base. Nor is it good for the portfolio to consistently hit high points at valuation time each year, as long term, this will likely result in a reduction in total distributions. As a general rule, a stable investment return will provide both greater income and a larger remainder interest. The income beneficiary will usually want the trust assets managed to ensure maximum payout and minimum tax liability. The downside is that it increases volatility and places the principal at greater risk. Contrast this with the needs of the charitable beneficiary, who may instead want trust assets managed to preserve the maximum amount of remainder interest. The job of the trustee is to balance the needs of both. A deferred annuity may be effective as an investment for a NIMCRUT. If permitted, income accumulates in the deferred annuity contract until such time as the trustee takes a distribution. This would allow the trustee to regulate the flow of income from the NIMCRUT in its later years to meet the needs of the income beneficiary. The language of the trust agreement, which must be consistent with applicable state law, determines when to recognize income from a deferred annuity contract (such as only upon a withdrawal from the contract). If the trust is silent as to this issue, then it is determined in accordance with state law. In most states, trust income does not have to be recognized until realized, meaning that it’s permissible for it to remain deferred inside the annuity. This gives the trustee a great deal of control over the income when he or she uses a deferred annuity.