Setting Up a Charitable Remainder Trust
You are a business owner who wants to move on to other things in life. None of your kids wants the business, and there are potentially few buyers. Yet you would like to get something for all your years of hard work, blood, sweat and tears, so just shutting the business down is not an option. You would also like to do some good for the community. How about giving your business to charity?
Marilyn Greene was the third generation of a family that had owned and operated the Bridgeview Golf Course in Columbus, Ohio, since 1930. Greene's husband, Sonny, decided that it was time for them to retire. They knew they didn't want to sell the 113 acres on Columbus' north side to developers, but they weren't sure what to do with the property. Financial planner Larry Waller of Waller Financial Planning Group suggested they donate the golf course to Columbus State Community College and establish a charitable remainder trust, or CRT. "Once the course was appraised at $4.1 million, we set up the trust so the Greenes' brothers and sisters would receive a comfortable amount annually for the rest of their lives," says Waller.
Columbus State could have chosen to sell the golf course, but it concluded that it was better to keep it. Keeping the course allowed the college to develop a golf course maintenance program, gave the college's landscape architecture students hands-on experience, and let the culinary arts students develop their talents in the course's clubhouse, to say nothing of the "greens fees" and other revenue from the operation of the course itself.
In a CRT, you donate property (for example, your stock in a closely held business) to a trust. While the trust is in effect, you can designate that the income from the trust (i.e., the dividends and other distributions the business pays to its owners) be distributed to yourself or your heirs. Upon your death, the business passes to the trust beneficiary, which must be a tax-exempt charitable institution. According to Waller, the benefits of a CRT, if it's set up properly, are many:
- You get an immediate charitable deduction for the full fair-market value of your business (determined by an independent appraisal), which you can carry forward into future tax years.
- Distributions from the trust during your lifetime (most of them, anyway) will be taxed at favorable capital gains rates.
- You avoid federal and state death taxes and probate costs when you die since the business passes outside of your will.
Waller says it is best if the charity knows in advance you are planning to give a business to them and participates in the planning process, because there's a pitfall for charities if they are not careful. If your business is engaged in activities that are unrelated to the charity's tax-exempt purpose, income from the business will be taxed to the charity as unrelated business taxable income (UBTI). Before Columbus State stepped up to the plate, Waller interviewed three different charities on the Greenes' behalf, two of which bowed out because of concerns about UBTI and the legal obligation of paying out the trust income to the Greenes' siblings. Says Waller: "Columbus State was able to use the golf course as part of its educational curriculum, so UBTI wasn't an issue for them. If the donated business had been a sporting goods manufacturer, on the other hand, the college probably would have turned down the bequest to avoid UBTI."
If you donate your business to a charity via a CRT, you no longer can work in the business once the CRT is established, nor can you pass the business on to a surviving spouse or other family member. "Once you die, the business has to go to the charity," says Waller, "although we have set up CRTs where the seller puts the business into the trust, which then sells the business immediately to an unrelated third party. The trust then invests the cash proceeds of the sale, distributes the investment income from the cash to the donor during his or her life, and distributes the cash balance to the designated charity upon the donor's death."
What if the donor has a difficult emotional time letting go of the business that has been his or her life's work? Waller points out that if the purchaser of the business is agreeable, the donor may be able to perform services as an independent consultant to the business, "but the seller has to be comfortable with the fact that he or she is giving up control to the buyer. They won't be the boss anymore."
CRTs are complicated trust arrangements, says Waller, and accordingly should not be attempted without competent legal, tax and financial advice. You should also watch your ethics. Says Waller, "You don't want to fob off a business that's losing money onto a needy charity that's unequipped to deal with the problems."