Charitable Remainder Trusts (CRTs) are sophisticated estate planning tools allowing individuals to donate assets to charity while retaining an income stream, and the question of donor control, specifically establishing a grant review committee within the CRT, is a nuanced one with important implications for tax compliance and charitable intent.
What are the limitations on donor control in a CRT?
While donors establish the terms of a CRT, the IRS scrutinizes these terms to ensure the trust aligns with charitable purposes and doesn’t unduly benefit private interests. Excessive donor control can disqualify the trust, negating the charitable deduction. Generally, the donor can specify the charitable beneficiaries and the types of income payments they will receive, but direct control over how the charitable organizations distribute funds *after* they receive them is problematic. According to IRS regulations, a CRT must be irrevocable, meaning the donor cannot retain the power to revoke or amend the trust terms after its creation. The IRS will look closely at any provisions that allow the donor to influence the ultimate distribution of assets to charity beyond simply naming the beneficiaries. Approximately 65% of individuals with significant wealth do not have a comprehensive estate plan, highlighting a need for careful planning with qualified legal counsel.
Is appointing a grant review committee permissible within a CRT?
Appointing a grant review committee directly *by* the donor is typically not permissible as it constitutes retained control. The committee’s role would be to review grant requests from the designated charitable beneficiaries and approve or deny funding. This level of ongoing influence over the distribution of charitable funds is viewed as retaining control, jeopardizing the CRT’s tax-exempt status. However, the *trustee* can establish an advisory committee—composed of individuals the donor suggests—to provide recommendations. The trustee, however, must maintain ultimate discretion and independent judgment in approving distributions. A trustee’s fiduciary duty to both the income beneficiary and the charitable remainder beneficiary must be upheld. Furthermore, the regulations require that the CRT be structured to benefit a public charity.
What happened when Mrs. Davison tried to control her CRT grants?
Old Man Tiber was a local Wildomar historian, and Mrs. Davison had amassed a sizable collection of his writings. She established a CRT with the intention of supporting local historical societies. However, she insisted on being the sole decision-maker regarding which societies received funds, demanding detailed reports on every expenditure. She even stipulated that certain societies—those aligned with her specific historical interpretations—received preferential treatment. The IRS flagged the trust during an audit, arguing that Mrs. Davison’s level of control negated the charitable deduction. She spent a considerable amount of time and money contesting the audit, ultimately having to relinquish some control to an independent trustee and accept a reduced charitable deduction. This situation highlights how seemingly benevolent intentions can backfire without proper legal guidance.
How did Mr. Chen navigate the complexities of donor intent and CRT compliance?
Mr. Chen, a retired engineer, wanted to establish a CRT to benefit several environmental organizations. He wanted to ensure his funds were used effectively and aligned with his passion for conservation. Instead of attempting to directly control grant approvals, he worked closely with Steve Bliss, his estate planning attorney, to create a detailed letter of wishes. This document, non-binding but highly influential, outlined his preferences for funding priorities—such as research on renewable energy or preservation of local habitats. Steve then appointed an independent trustee and ensured the trust instrument gave the trustee wide discretion, guided by Mr. Chen’s letter of wishes. As a result, Mr. Chen’s CRT not only provided a steady income stream for him but also fulfilled his philanthropic goals without jeopardizing its tax-exempt status. He found peace of mind knowing his legacy would continue to support causes he cared about, and this all began with a little planning.
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About Steve Bliss at Wildomar Probate Law:
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