Loan to fund CRT

Loan to fund CRT

Forum topic posted in Forum on 12 August 2008| 7 comments
audience: | last updated: 12 August 2008
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Joined: 03/16/2000
Points: 83
Client has illiquid assets, and his trust creates several CRT's on his death. He plans to have his Successor Trustee borrow from a bank during the period of estate administration to partially fund the CRT's until the illiquid assets can be sold, which could be several years after his death. Will this create UBIT for the CRT's or any other adverse tax consequences?

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Joined: 04/08/2009
Points: 40
There is a successor trustee
There is a successor trustee named in the trust document. Upon her death, the successor trustee will be dealing with illiquid trust assets. The successor trustee wants to begin the duty of funding the charitable remaindertrusts/bequests under the former revocable trust but prefers not to, and advisedly so, do so with illiquid assets. The successor trustee approaches a third party lender, borrows from that lender, and pledges trust assets. Thank you.
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Joined: 04/08/2009
Points: 40
The successor trustee
The successor trustee approaches a third party lender, borrows from that lender, and pledges trust assets. The successor trustee then proceeds to partially fund the charitable remainder trusts that are the beneficiaries under the trust with cash the trustee of the decedent's trust borrowed. The CRTs are not debtors on the loan.
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Joined: 02/04/2002
Points: 15
Loan to Fund CRT
I'm a little confused. Most of the CRTs that I deal with the donor is looking for a bypass of capital gains. It sounds to me that if a loan is used to fund the CRTs then there wouldn't be any capital gains bypass when the property is sold to pay off the loan. If a bypass of capital gains is not an issue, then I'm not sure what the question is.
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Joined: 03/16/2000
Points: 83
Robert E. KassBarris, Sott,
Robert E. Kass Barris, Sott, Denn & Driker, PLLC Detroit, MI John has stated the facts correctly. Also, it is possible that income from the illiquid assets will be used for other purposes, such as paying specific bequests and funding other residuary bequests. The concern here is getting sufficient liquidity to make the CRT payments, without creating problems.
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Joined: 09/23/2007
Points: 15
Loan to fund CRT
I want to recite the facts differently assuming I read them correctly. Client has created a revocable trust. She is her own trustee. There is a successor trustee named in the trust document. Upon her death, the successor trustee will be dealing with illiquid trust assets. The successor trustee wants to begin the duty of funding the charitable remaindertrusts/bequests under the former revocable trust but prefers not to, and advisedly so, do so with illiquid assets. The successor trustee approaches a third party lender, borrows from that lender, and pledges trust assets. The successor trustee then proceeds to partially fund the charitable remainder trusts that are the beneficiaries under the trust with cash the trustee of the decedent's trust borrowed. The CRTs are not debtors on the loan. As the illiquid trust assets are sold, the trust loans are extinguished and the successor trustee of the trust continues to fund the CRTs. It would be good to determine whether any income from the illiquid assets s/b distributed elsewhere, such as to a specific devisee or to a marital trust, rather than debt service. Also, heed Mr. Henry's advice not to deal with debt service on assets within a CRT.
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Joined: 03/09/1999
Points: 90
Loan to fund CRT
YES. Debt encumbered or debt-financed property inside a CRT should be avoided. Vaughn W. Henry
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Joined: 10/25/2005
Points: 15
Loan to Fund CRT
Vaughn: I agree that debt financed assets within the CRT will cause problems. But, if the loan is secured by assets of the estate and the uncumbered cash is in the CRT, I'm not sure that creates debt-fiananced property within the CRT. If I borrow money from the bank, pledge my farm as security for the loan and use the cash to fund a CRT will that be a problem?
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