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November 2017
Having detailed discussions early can help prevent confusion and frustration well into the future, setting the stage for a long and beneficial relationship between the non-profit and its donor.
OVERVIEW
Charitable remainder trusts (CRTs) continue to be an important option for donors when fulfilling their charitable intentions.
However, situations arise where there is a misunderstanding or simply a difference in expectations between donors and non-profits about how the trust investments will perform, the potential level of remainder assets to the non-profits and the annual tax implications to the beneficiaries.
ANALYSIS
We believe it is important to address these potential differences during initial discussions with donors, and recommend taking the following steps during initial donor conversations prior to completion of a CRT gift in order to ensure that both the donor and the non-profit are in agreement.
1. Define Goals and Objectives Early
Have a clear discussion about the donor's ultimate goals and objectives. They can be used as critical inputs into the investment decision-making process, and can also provide a precise benchmark that can be revisited in follow-up conversations.
2. Identify Tax Considerations
Given that the taxation of trusts is based upon a four-tiered system that distributes highest-taxed income first, it is important to have the tax discussion with the donor prior to the funding of the trust, so that he or she can understand and anticipate what future taxation of payments could potentially look like.
3. Clarify Investment Decision-Making
Don't allow the donor to believe he or she can drive the investment decision-making process after the trust is created. The donor should not direct specific asset allocation decisions or the use of specific investment vehicles within the trust.
4. Set Realistic Expectations
It is quite common for donors to extrapolate recent performance and assume a strong investment return environment will continue indefinitely into the future. History tells us, however, that eventually this will not be the case.
5. Address Potential Investment Misperceptions
While investment sophistication has become more widespread in recent years, this trend has not necessarily reached every planned giving donor. To help uncover investment misperceptions, development officers may want to inquire directly about donors' prior investment experience or knowledge so any issues can be addressed.
IMPLICATIONS
Involve a BNY Mellon Investment Professional
Determine the Investment Strategy
A BNY Mellon investment officer can help the development team and the donor at the outset of a trust by presenting varying allocation options and their forward-looking implications, including potential returns and market values.
Integrate the Donor's Goals and Objectives
After taking into consideration the donor's goals, the investment officer can suggest allocation strategies that may best align with the needs of the donor and the organization.
Illustrate Future Return and Remainder Values
Suggested allocations are then combined with BNY Mellon's capital market assumptions and run through a Monte Carlo simulation, which provides forward-looking projections of the allocation's impact on both future investment returns and remainder market values.
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