Evan Unzelman
In September, we authored Selling a CRT Income Interest, in which we described the growing market for income interests in Charitable Remainder Trusts (CRTs). The article discusses how to value CRTs, why income beneficiaries are selling, why buyers are paying premiums, and tax and legal considerations. This article is intended as a follow-up to this article.
Background on the Transaction
By way of review, a CRT is a split-interest trust to which a grantor donates assets and from which the grantor receives a series of payments, usually lasting until his or her death.
These CRTs, usually created for tax reasons, are generally thought of as "lifetime lock-ups" by both advisor and client. In other words, in exchange for the tax advantages garnered from a CRT, a client is presumably left with a large, valuable, but illiquid asset - the right to receive income from the CRT.
However, as Selling a CRT Income Interest explains, income beneficiaries of CRTs need not wait the rest of their lives to realize the full value of their CRTs, as a niche group of buyers has emerged over the past decade to provide liquidity to CRT income beneficiaries.
Our firm specializes in facilitating sales of CRT income interests. We have reviewed hundreds and hundreds of cases and found that, in general, the sell option is the best economic decision for the client. That is, it simply makes more economic sense to convert a long and uncertain stream of payments into an immediate and certain lump sum payment at a price that reflects a premium to the net present value to the grantor of the future annual distributions from the CRT.
3 Reasons Why CRT Income Beneficiaries Are Selling Now
We've been active in this market since early this decade, and our experience has shown value maximization (described above) as the primary driver behind seller motivation. During the past few months, we've seen an unprecedented increase in interest from CRT income beneficiaries in selling. What's notable is that this interest is not generally rooted in value maximization. Instead, advisors are using the down market and currently low tax rates to exploit rare opportunities for their CRT clients.
1. Less Taxes and Fees
With the market worth roughly 40% of what it was a year ago, and probably worth less than it will be in a year or two from now, a sale today means clients pay less taxes and less transaction costs. And when the markets recover, clients will have their money out of their CRTs and be ahead by those saved taxes and transactions costs.
2. Take Advantage of Capital Losses
Most clients will have capital losses in 2008. A CRT sale allows advisors to harvest these capital losses, as they can be used to offset some or all of the capital gain from the sale.
3. Powerful Tax Planning Alternative
Capital gains rates are at historically low levels. Selling an income interest today enables clients to lock in the currently low rates, and avoid exposure to future tax rate increases.
In September, we authored Selling a CRT Income Interest, in which we described the growing market for income interests in Charitable Remainder Trusts (CRTs). The article discusses how to value CRTs, why income beneficiaries are selling, why buyers are paying premiums, and tax and legal considerations. This article is intended as a follow-up to this article.
Background on the Transaction
By way of review, a CRT is a split-interest trust to which a grantor donates assets and from which the grantor receives a series of payments, usually lasting until his or her death.
These CRTs, usually created for tax reasons, are generally thought of as "lifetime lock-ups" by both advisor and client. In other words, in exchange for the tax advantages garnered from a CRT, a client is presumably left with a large, valuable, but illiquid asset - the right to receive income from the CRT.
However, as Selling a CRT Income Interest explains, income beneficiaries of CRTs need not wait the rest of their lives to realize the full value of their CRTs, as a niche group of buyers has emerged over the past decade to provide liquidity to CRT income beneficiaries.
Our firm specializes in facilitating sales of CRT income interests. We have reviewed hundreds and hundreds of cases and found that, in general, the sell option is the best economic decision for the client. That is, it simply makes more economic sense to convert a long and uncertain stream of payments into an immediate and certain lump sum payment at a price that reflects a premium to the net present value to the grantor of the future annual distributions from the CRT.
3 Reasons Why CRT Income Beneficiaries Are Selling Now
We've been active in this market since early this decade, and our experience has shown value maximization (described above) as the primary driver behind seller motivation. During the past few months, we've seen an unprecedented increase in interest from CRT income beneficiaries in selling. What's notable is that this interest is not generally rooted in value maximization. Instead, advisors are using the down market and currently low tax rates to exploit rare opportunities for their CRT clients.
Here are the three main reasons these advisors are pursuing the sale option.
1. Less Taxes and Fees
With the market worth roughly 40% of what it was a year ago, and probably worth less than it will be in a year or two from now, a sale today means clients pay less taxes and less transaction costs. And when the markets recover, clients will have their money out of their CRTs and be ahead by those saved taxes and transactions costs.
2. Take Advantage of Capital Losses
Most clients will have capital losses in 2008. A CRT sale allows advisors to harvest these capital losses, as they can be used to offset some or all of the capital gain from the sale.
3. Powerful Tax Planning Alternative
Capital gains rates are at historically low levels. Selling an income interest today enables clients to lock in the currently low rates, and avoid exposure to future tax rate increases.
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