In a recently published article, “Split-Interest Trusts, Filing Year 2009,”1 the Internal Revenue Service offered a bird’s eye view of charitable trusts that includes information helpful to professionals who include philanthropic planning in the services they provide. Each year, the trustees of split-interest charitable trusts—charitable remainder trusts (CRTs), charitable lead trusts (CLATs) and pooled income funds (PIFs)—are required to file Form 5227, an informational return designed to disclose the financial activities of these entities.
Here’s a summary of a some of the findings the IRS reported after it studied information provided in the Form 5227s filed for 2009.
The Big Picture
The IRS reports that 122,541 trusts filed form 5227 in 2009. As in prior years, the combination of charitable remainder unitrusts (CRUTs) and charitable remainder annuity trusts (CRATs) accounted for the vast majority of the filings, some 114,000. Of that number, 96,000 (84 percent) were CRUTs and 18,000 (16 percent) were CRATs. There were about 6,600 charitable lead trust (CLT) returns filed, as well as a little more than 1,400 PIFs.
Within the category of CRUTs, the IRS also separated the trusts by the specific type of unitrust. The vast majority, 78 percent, of CRUTs are standard payment trusts, making a payment equal to a percentage of the assets of the trust as valued annually, whether the trust earned the amount necessary to make the payment. The net income unitrust (NICRUT) was the structure choice for only 5 percent of the trusts. The net income unitrust with makeup provision (NIMCRUT), made up 17 percent.
Of interest to those advising high-net-worth individuals, these percentages were fairly constant for CRUTs with under $3 million in assets. For trusts holding $3 million or more in assets, over two-thirds were standard payment trusts, but some 31 percent were net income trusts, with 27 percent structured as NIMCRUTs. This appears to indicate that high-net-worth individuals are more willing to take risks associated with a trust structure which, in some years, could result in little or no income, while serving to preserve corpus for future growth and earnings.
What’s the Payout?
The IRS also provided specific information about payment rates for CRUTs. (See “How Much is Enough?” p. 17.) Note that the majority of unitrusts pay rates in the 5 percent to 7.9 percent range. There are still trusts in existence that were created in the 1990s, when payout rates of 9 percent and higher were common, but as time progresses, we expect to see fewer trusts with payment rates in the higher ranges.
No payment rate information was given for lead trusts, but the amount of income and principal distributed by lead trusts amount to 6.6 percent of the stated value of trust assets for 2009.
Length of Time
The IRS article also reported how long different types of trusts were in existence. CRATs lasted the shortest period of time, on average, at 13 years. This time period translates into the life expectancy of a 74-year-old woman or a 71-year-old man. For unitrusts, the average time period was 15 years, indicating an estimated average age for those creating them for lifetime payments of 71 and 68 years of age, respectively. While CRTs can be created for a term of years or a combination of one or more lifetimes or a term of years, based on these IRS figures, it appears that most CRTs are established around the time of a donor’s retirement.
The article also reveals that CLTs are in existence for an average of 16 years. In today’s interest rate environment, with an applicable federal midterm rate of 1.2 percent for June 2012, a CLAT would need to make payments of 6.9 percent to result in a 100 percent gift or estate tax deduction.
Most Productive for Charity?
The article goes into significant detail regarding the amount of income and principal distributed for charitable and non-charitable purposes by type of split-interest trust.
For 2009, CRTs distributed a total of $1.27 billion to charitable recipients, with CRUTs making up 85 percent of that total. Given the relatively recent resurgence in the use of CLTs, it may be somewhat surprising that they distributed $1.22 billion for charitable purposes. CLTs actually distributed more to charity than CRUTs in 2009. If the growth in the number of CLTs continues to outpace CRTs, as it has over the past decade, CLTs may soon become the largest provider of split-interest trust revenue to nonprofits.
According to the article, the average size of CRTs is $910,000, while the average size of CLTs is $2.7 million. Further analysis reveals that, in this case, averages can be very deceiving. “Don’t be Fooled,” this page, indicates that 86 percent of CRTs and 65 percent of CLTs hold assets valued at less than $1 million.
Note that the percentage of CLTs over $3 million in size skews the averages. When examining the average size of trusts by the same dollar categories in “Don’t be Fooled” and “Skewed Averages,” this page, the average size of CLTs and CRTs isn’t that different within the size categories.
You may be surprised that 86 percent of CRTs average $260,000 and 65 percent of CLTs average $304,000. The expansion of service offerings by those who serve as trustee, administrator and/or asset manager of split-interest trusts and the advent of computer-aided administration has apparently resulted in the creation of a larger number of smaller trusts in recent years and made these gift vehicles more affordable to a broader range of donors.
Trust and Administration Costs
For those interested in the size of the market for providing services to split-interest trusts, the total of trustee, accounting, legal and other fees for 2009 was over $1.4 billion, or 1.1 percent of the total asset holdings of split-interest trusts.
1. Additional information regarding asset allocation, expenses and other useful data can be found in the complete report, “Split-Interest Trusts, Filing Year 2009” by Lisa Schreiber Rosenmerkel at www.irs.gov/pub/irs-soi/11insitrusts09winbull.pdf.