Charitable Remainder Unitrust

Charitable Remainder Unitrust

Forum topic posted in Forum on 16 July 2008| 22 comments
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Joined: 07/16/2008
Points: 135
When Father-in-law passed away 10/2006 he setup a CRUT for my wife in his will. I was told by the executor of his estate that the trust was partially funded and that the beneficiary (my wife) would not receive any distributions until the trust was fully funded. Unfortunately, the executor of the estate said that the IRS was doing an audit on the estate and it would probably take up to 24 months until the trust was fully funded. The Estate Tax Return wasn't filed until: 01/2008. Also, the executor of the estate said that the Charitable Organization required the Trust to be fully funded before they would make any distributions. My question is: Is it possible to receive benifits/distributions from the partially funded trust under special curcumstances (my wife is very ill and we need the income from the trust for her care). I am guessing that the Trustee of the Trust should have the authority to allow this distribution, unless prohibited by law. Thanks, in advance.

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Lee Hoffman's picture
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Joined: 05/23/2003
Points: 4490
Thanks you Mr. Creamer
Thank you Mr. Creamer for having the foresight to use the Internet to solicit answers to your questions that dramatically affect your family and specifically your wife. I hope all goes well and please return to the PGDC and refer your friends. You have received answers from some of the best minds in the charitable estate planning and planned giving industry. Your acceptance of our technology and community is the beginning of a new frontier where donors will be able to ask questions of advisers all over the United States and eventually the world. I am truly pleased by your appreciation of the over 20,000 members of the PGDC who represent individuals committed to enhancing relationships between donors, their advisers and the charities they benefit. Thank you for your participation. You may call me at any time to discuss your experience of our social experiment and how we may better serve those individuals and families that make a difference in this country and the world.

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Joined: 07/16/2008
Points: 135
Crt Funding/Distribuuion
Kathleen and everyone else who has comments, I called the attorney for the Charitable Organization that is responsible for the administration of the Trust and they did agree to start distributing benifits by the end of this year. My Father-in-laws will had set up five Trusts in his will for different members of his family. The attorney said that their organizations policy though was to normally wait until a Trust is fully funding before starting distribution of benifits, but due to the fact that all of the other beneficiaries wanted distributions right away that they could start distributions by the end of this year. Thank you everyone for your comments, you've been a great help and I really do appreciate it very much!
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Joined: 04/13/1999
Points: 45
Trustee's power to delay distributions from CRUT
This depends partly on what the law of the particular state allows, but the federal tax regulations do not require a trustee of a CRT to postpone distributions until the end of the year in which the trust is completely funded. They do ALLOW it to do so. See Reg. 1.664-1(a)(5). Regardless of when distributions begin, if the trustee finds that it has distributed too much, it must recover the excess from the beneficiary (directly or by withholding it, and appropriate interest, from future payments), and if it distributed too little, it must make up the difference and pay interest on the postponed amounts. In this case the trustee may be concerned that a future IRS audit might generate additional estate tax liability that, in turn, would reduce the amount passing to the trust. That would not prevent the trustee from making interim distributions based on some lower trust value that it considers "safe". A cautious trustee may want approval from the charity that will take the remainder, as well as the beneficiary's written agreement to repay any overpayments; but unless state law is unusually restrictive, nothing in the federal rules appears to prevent the trustee from starting limited unitrust payments before the estate tax issues are completely ironed out. Not legal advice, just observations.
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Joined: 07/16/2008
Points: 135
Trustee's power to delay dist from CRUT
Mr. Gray, the charitable trust is in Texas and from what I've been told by the Attorney is that the charitable organization policy is to not distribute any benifits to the benificiaries until the Trust is fully funded. Frankly, I don't like it, but what can I do?, if anything. We aren't in danger of losing this Trust are we?
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Joined: 07/05/2000
Points: 60
Enforcement of CRUT Terms
I think you are being advised to seek to enforce the Will, not challenge it. You are questioning the executor's administration of the Will, not the terms of the Will. And you have been advised that the manner in which the executor is administering the Will could have adverse tax consequences for the charitable remainder trust that your wife's father created for her benefit, and therefore, for her as beneficiary. You mentioned that the trust was partially funded, and I would think that to the extent that it has been partially funded that there may in fact be a legal / tax problem with the Trustee's refusal to make any distributions whatsoever from the trust to the beneficiary. But someone needs to review the trust, Will and facts, and then they can advise you properly.
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Joined: 07/20/1999
Points: 15
Interim Funding of Testamentary CRT
We had a funding of the remainder after other disposition to a testamentary CRT. We thus had issues with awaiting tax clearance (not to mention the circular calculation of the amount of the remainder due to the charitable interest implied by the CRT). The trustee determined to fund a partial level with retainage for final funding when the tax clearance was received. In making the partial and initial funding, there is a requirement to make a make up distribution from the CRT from the date of death to provide the beneficiary with the value due them to make up for the delay.
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Joined: 07/16/2008
Points: 135
Interim Funding of Testamentar CRT
Randy, this language is in the will: In making the partial and initial funding, there is a requirement to make a make up distribution from the CRT from the date of death to provide the beneficiary with the value due them to make up for the delay.
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Joined: 11/14/2000
Points: 15
What is fully funded?
It is my understanding and I believe mandated by the IRC that payments must be made unless the CRUT is actually a Flip CRUT and is in the net income phase. Then distributions of income must be distributed. How do you know when a trust is fully funded. Maybe with this testamentary you know the assets intended for the trust but what will they be worth. I think the trust would fail IRS scrutiny and would be disqualified as a charitable trust if payments are not being made. I am not aware of any acceptable specific language included in a CRUT that would allow the delay of payments. The only way I have found to delay payments for a net income trust would be to invest in non-income producing vehicles. No way to delay CRUT payments!
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Joined: 06/26/2007
Points: 15
CRUT funding
I agree with Charles - sounds like hokum. Unless there is specific language in the trust document delaying distributions until the trust is fully funded, the trustee is required to distribute at least annually a fixed percentage of the accumulated balance of the CRUT. Absent trust provisions that allow the delay of distributions, failure to make a trust payout can have adverse tax consequences for the trust, including disqualification of the trust under IRC sec. 664. I'd recommend having an attorney who's familiar with charitable trusts review the documents.
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Joined: 07/16/2008
Points: 135
CRUT funding
Seeking the advise of an attorney sounds like the thing to do here, but my Father-in-laws will specifies that if anyone named in his will challenges the will for whatever reason that their Trust would be revoked. Not that I or my wife would be challenging the will.
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Joined: 07/16/2008
Points: 135
CRUT funding
Yes, I do remember reading in the will of my Father-in-law that there is a paragraph that says something about deferred income from the Trust until the Trust was fully funded. So, this means we will have to wait till that happens, right.
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Joined: 04/04/1999
Points: 45
Distributions during period of Administration
I certainly can't speak to any legal issues, but the CRT regulations contemplate payments directly from the estate or formerly revocable trust in lieu of CRT payments, and partial funding during administration. See Treas. Reg.
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Joined: 04/28/2006
Points: 15
CRUT Funding
It could be the pers rep doesn't want to make partial distributions because the CRT is funded with an asset that is subject to a valuation adjustment by the IRS and he doesn't want to take a chance on over distributing the unitrust amount so he wants to wait until the IRS has accepted the value of the asset. Typically the IRS does not lower the value of an asset so I would think the pers rep could be convinced to make a partial distribution. Also, a CRT has language that allows the pers rep/trustee to adjust for distributions that were made using an incorrect value, so even if the partial distribution was later determined to be incorrect, a correcting adjustment could be made.
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Joined: 07/16/2008
Points: 135
CRUT funding
Dean, I think you are correct because I know in my Father-in-laws will he had many acres of Timber land in Arkansas, which was appraised by some Appraisal Firm. The Attorney stated that the only doubt about any assets of the estate was the valuation of the Timber land. He said the IRS might question this appraisal. Thanks for the advise. I am going to call up the attorney for the Trust and ask for partial distribution.
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Joined: 01/09/2003
Points: 30
CRUT funding during estate audit
Sounds like hokum. But, was the funding a via pecuniary bequest, specific bequest or otherwise? Properly drafted, the CRUT will not allow for the payment of estate taxes out of the portion used to fund the CRUT. Therefore, any angst about not having $ for additions to taxes should not preclude a funding and disribution to the income beneficiary. But, was the CRUT properly drafted? Is the Executor also the drafting attorney?
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Joined: 07/16/2008
Points: 135
CRUT funding
Sorry, I am new to this lingo ( pecuniary bequest ). If you mean setting up the will, I think my Father-in-law handled that, but I'm just not sure. The attorney sent me a copy of the will and IRS Estate Tax Return Form (706 I think) and I've been reading thru it trying to understand all of this. The attorney said the estate taxes were paid on 01/2008, but that the IRS would do an Audit because my Father-in-laws estate was just large enough. Attorney said the Trust could'nt be fully funded until the IRS was done with the Audit. Said additional taxes may be due on the estate.
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Joined: 08/12/1999
Points: 30
Testamentary CRUT distributions during estate administration
It is not only possible to make distributions prior to funding, but it is also possible to make them from the estate instead of the trust and have them imputed to the trust.
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Joined: 02/15/2000
Points: 30
Periodic funding of CRUT
Indeed, I have several clients who have provided for periodic additions to their CRUTs, and the language of the agreement permits income distributions immediately. The Regs and the IRS prototype forms specificially include language that permits adjustments in the income in the event that a subsequent tax or accounting audit discloses that an error was made in the original calculation; other provisions direct how the income from later additions are to be handled.
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Joined: 12/12/2006
Points: 15
CRUT Funding/Distribution
I have had expereinces where the CRUT was funded over a period of time due to illiquid assets in the estate as well as just plain old estate administration time. In all instances, the CRUT Trustee made a partial distribution to the CRUT beneficiary. I am not aware of any code that prohibits partial CRUT distributions.
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Joined: 04/19/1999
Points: 75
CRUT Funding/Distribution
A testimentary CRT is deemed to be created on the death of the decedent, and the obligation to pay the unitrust amount begins as of the date of death, however that requirement may be deferred understanding that administration takes time. The Regs. state at Reg.1.664-1(e)(5): "If permitted by applicable local law or authorized by the provisions of the governing instrument, the requirement to pay such amount may be deferred until the end of the taxable year of the trust in which occurs the complete funding of the trust." So if local allow OR the document allow it, the payments may be delayed. However, I believe the fiduciary in this case should be sensitive to needs of the beneficiary and make a partial unitrust distribution now. It will also save the trust interest on past due amounts. Kathleen Bryan
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Joined: 05/07/2007
Points: 75
CRT/Funding Distributioon
You are not being told the truth and risk causing the CRT to be disqualified because payments are not being made by the date the 5227 is due. I would demand opinion of counsel that they have the right to withhold payments.
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Joined: 04/06/2006
Points: 15
crut funding/distributions
I agreee of course not to be relied upon as legal adivse or opinion.
7520 Rates: October 2.2% September 2.4% August 2.4%

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