CRT to Assist in the Race to Treat ALS

CRT to Assist in the Race to Treat ALS

News story posted in Charitable Remainder Trust on 30 September 2006| 1 comments
audience: National Publication | last updated: 18 May 2011


Employing a philanthropic venture capital strategy, a charitable remainder unitrust has transferred $24.5 million to a biopharmaceutical company in exchange for a royalty interest in worldwide sales of a drug for the treatment of ALS currently in late-stage development by the company.

By Marc D. Hoffman, Editor-in-Chief
Planned Giving Design Center

Full Text:

Amyotrophic Lateral Sclerosis is a devastating neurodegenerative disease. Also known as Lou Gehrig's disease after the famous New York Yankee who succumbed to it in 1941, one American is diagnosed with ALS and another dies from the disease every 90 minutes.

CytRx Corporation (Nasdaq:CYTR) is a biopharmaceutical company that is developing a drug called Arimoclomol for the treatment of ALS. According to the company, Arimoclomol has already been granted Fast Track designation and Orphan Drug status by the FDA and is currently in Stage IIa clinical trials. Results are expected to be announced later this month. If approved by the FDA for further development, the drug will move into expanded Stage IIb trials in the first half of 2007 with approximately 390 ALS patients recruited from 30 clinical sites in the United States and Canada. These trials are expected to last about 18 months.

Because of the severity and rapidity of the disease, and the fact that only one other FDA approved drug for the treatment of ALS exists, an anonymous donor with an interest in ALS came forward to help finance further development of the new drug. The first challenge faced by the donor was how to efficiently convert highly appreciated securities owned by the donor into cash for use by the company. The second was how to design an investment structure that would be acceptable to company management, its shareholders, and provide value to charity.

Because of dilution concerns, CytRx determined the donor would not purchase an equity interest in the company; rather, the company offered a 1% non-dilutive royalty interest on worldwide sales of Arimoclomol should it come to market.

After researching the issue, The ALS Association's national Director of Gift Planning, Juan C. Ros, CSPG, recommended the donor consider donating his appreciated securities to a newly formed charitable remainder unitrust. The trustee could then liquidate the securities on a tax-deferred basis and use the cash proceeds to purchase the royalty interest from CytRx. The trustee would, however, be under no obligation to make the purchase. The donor's counsel and CytRx counsel agreed this approach had merit.

On August 29, 2006, CytRx announced the completion of the trust and the $24.5 million royalty agreement. In a company conference call conducted on September 6, 2006, CytRx President and CEO Steven A. Kriegsman stated the trust had hired an independent appraisal firm to perform due diligence on the potential efficacy of the drug and on CytRx management. Based on the results of this investigation, the trustee chose to move forward with the investment prior to the company's announcement of trial results or FDA approval.

Trust Design

Because the major asset of the trust might ultimately be a royalty agreement that would not produce income until (and if) the drug went to market, a net income (without makeup provision) unitrust was selected. This format was determined to be compatible because royalty payments are included in the definition of trust accounting income under the terms of the trust instrument and local law; therefore, they would be distributable in satisfaction of the unitrust amount.

The trust will terminate upon the earlier of one year after its creation or the death of the income recipient with the remainder interest payable to The ALS Association, Greater Los Angeles Chapter. However, given the development cycle of the drug, it is unlikely the income recipient will receive any payments prior to the trust's termination. In addition, the trust includes a provision that permits the trustee to make distributions of income or principal to the charitable remainderman during the trust term.

According to the ALS Association, any income it receives from the royalty interest will be used in furtherance of its mission to find a cure for and improve the lives of those living with ALS. As the only national not-for-profit dedicated solely to the fight against ALS, The ALS Association suggested the approach while strictly adhering to its Corporate Relations Policy that prohibits endorsements and maintains The Association's independent position on all issues affecting the welfare of people with ALS.

A Prudent Investment?

From an investment standpoint, it is also important to note that royalties are specifically excluded from the definition of unrelated business income under IRC §512(b)(2). Therefore, the royalty payments will not cause the trust to lose its tax-exempt status; nor will they be taxable when received by the charitable remainderman. However, the more important issue is how the trustee reconciled investing the majority of the trust's assets in such a high risk investment with the requirements of the Uniform Prudent Investor Act. For example, UPIA §2(e) states that "all categorical restrictions on types of investments have been abrogated; therefore, the trustee can invest in anything that plays an appropriate role in achieving the risk/return objectives of the trust and that meets other requirements of prudent investing."

To further illuminate this issue, we refer to an excerpt from "Not Your Typical CRT - The Venture Capital Unitrust" by Dan Rice, published by the PGDC in June, 2000:

For example, the California Uniform Prudent Investor Act provides that a trustee must invest and manage trust assets as a prudent investor would and must exercise reasonable care, skill and caution. If, however, taking into account the trust's investment strategy, the trustee determines that an investment in risky or speculative assets is appropriate for the trust, then such investment is permissible.

Asset Diversification

Must a charitable remainder trust's assets be diversified? Depending on state law, perhaps no. For example, the general rule under the California Prudent Investor Act is that, unless the trust document otherwise provides, the trustee in making and implementing investment decisions must diversify assets unless he or she can show that it is prudent not to do so. The Venture Capital Unitrust instrument includes language stating that the trustee shall have no duty to diversify Trust investments. This provision complies with the California Act and relieves the trustee from the general requirement to diversify.

Donor's counsel anticipated this issue and included provisions that exempt the trustee from the prudent investor requirements of reasonable return and diversification. The key to these exemptions rested in the trustor's belief that finding a cure for ALS is in keeping with the mission of the charitable remainderman and that accomplishing it may require extraordinary investments that are not governed by narrow legal investment standards. The trust is governed by California law.


Although over 120,000 people live with ALS worldwide with 50% dying within 18 months of diagnosis and 80% within five years, it is still considered an "orphan" disease by the U.S. pharmaceutical industry because it afflicts less than 200,000 Americans and therefore provides little financial incentive for the private sector to make and market new medications to treat it. ALS is just one of 5,000 such orphan disorders. Perhaps creative philanthropic partnerships of this type can help bridge the gap.

We extend our thanks to Juan Ros and Fred Fisher of The ALS Association for their assistance in this article. The greatest thanks, however, are due the donor who has chosen to remain anonymous.

This article may contain forward-looking statements made by CytRx management within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and is not intended to constitute a recommendation or endorsement of any investment.

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"Charitable Purpose" CRT

Never overlook the possibility of a CRT with direct charitable intent. Since rent is also excluded from UBI, and therefore is "safe" income for a CRT, I have worked on a few CRTs where the idea was to contribute an appreciated asset, sell it, and reinvest the proceeds in a building to be used by the eventual remainder interest holder in the CRT. They were all NIMCRUTs or NICRUTs to avoid having to distribute back any real property to the donor. In one case, the donor wanted to be sure that if the charity dissolved that the value of their donation would not go to general creditors (instead, another charity could use the building for charitable purposes).

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