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Lucy finished college and headed west. She started as a financial analyst with a large company in Seattle. After just four years, she became a Registered Investment Advisor and began advising clients. Lucy also managed her own investments. With her keen insight into financial markets, Lucy soon began to move from traditional stocks and bonds into futures and commodities markets. Lucy realized that “shorting” financial stocks was going to be a bonanza. She was so successful in the down market that she now only manages her own large personal portfolio.
Somewhat later in life, Lucy discovered the wonderful world of philanthropy. She volunteered at her favorite nonprofit and learned that giving a helping hand to someone in need is even more gratifying than making another million dollars in the futures market. After reading in the charity’s weekly enewsletter about a charitable remainder trust, Lucy called Clara, a gift planner at her favorite nonprofit.
Lucy suggested that she would like to transfer $5,000,000 of securities to a 5% net plus makeup unitrust (NIMCRUT). She would serve as trustee, including making the investment decisions, and the nonprofit would be the remainder recipient. Since Lucy normally earns 18% per year on her futures and commodities investments, she feels that it would be easy to make the unitrust grow to $10,000,000 or more.
Would this plan work? May Lucy serve as trustee? Is it permissible to invest unitrust assets in the futures market?
With a potential $10,000,000 gift from the unitrust, gift planner Clara wants to make this plan work. After research, Clara discovered that it is permissible for Lucy to name herself as trustee. The trust document can also include provisions to appoint an independent special trustee to handle hard-to-value assets or for other necessary purposes. The nonprofit or a corporate trustee could be named as successor trustee. Also, a trust administration company can be hired to do the accounting and unitrust tax returns. This service is usually available for a reasonable fee each year.
However, there is an obstacle to Lucy’s charitable plan. The key issue is the unitrust investments. Unitrusts are generally subject to Sec. 4944 rules on investments that may jeopardize the charitable remainder. A CRT is subject to the private foundation rules. Section 4944 imposes a tax on any investment that jeopardizes the carrying out of any of the exempt purposes of a private foundation. Section 53.4944-1(a)(2)(i) states that an investment shall be considered jeopardizing if the foundation managers have failed to exercise ordinary business care and prudence under the facts and circumstances prevailing at the time the investment is made. While no category of investments shall be treated as a per se violation, certain types of investments (such as investments in futures, options, puts and calls) require scrutiny to determine whether the foundation managers have met the requisite standard of care and prudence.
However, in PLR 200218038 (note that a PLR is not legal tax precedent), the Service permitted a private foundation to use four brokers to invest in futures and commodities. Lucy’s plan is clearly somewhat aggressive. However, if she is willing to use methods for her futures and commodities investments that reduce the risk to the “ordinary business care and prudence” standard, her plan may be acceptable.
A solution is to use a combined investment strategy. Lucy will be investing both the unitrust assets and her personal portfolio. Since she knows that some investments are riskier than others, she uses her personal assets for most of the risky investments, and her unitrust is invested in less risky securities that meet the prudent investor standards.
Lucy used that method very successfully. Her unitrust with “conservative” futures and commodities investments averaged a 14% return, while her personal portfolio produced a greater return with greater risk and volatility. Lucy considers herself “lucky” that she now has a large personal portfolio, a large unitrust and a warm feeling from helping others.
Stock Unitrust Payouts to Donors
The Values-Based Charitable Remainder Trust
