Focus on Foundations: Record Keeping for Charitable Remainder Trusts
In addition to the annual federal filing requirements for a charitable remainder trust (“CRT”) (Forms 1041-A and 5227), donors and trustees should keep in mind the reporting requirements associated with the termination of a CRT1. In particular, the state attorney general’s office may request or require an accounting of the financial transactions of a CRT from inception until termination. The accounting needs to identify and value all of the assets originally transferred to the CRT. All subsequent trust income, distributions, asset purchases, asset reinvestments, trustee commissions, investment service fees, legal fees, and other expenses must be recorded in detail. Finally, the fair market value and description of the assets that remain in the trust upon termination must be properly accounted for.
Although the attorney general may not necessarily require financial statements to be submitted, the trustees should keep all monthly statements during the pendency of the CRT to allow the trustee to complete an informal accounting (or a formal accounting, if required by a court) at the time of termination of the CRT.
Although a CRT provides substantial federal income and estate tax savings to the donor, even the best estate planning and drafting will fail if the CRT is not administered in accordance with its provisions, the Internal Revenue Code, and state law. This was the (harsh) lesson of the holding in the case of Atkinson v. Comm’r.2 In Atkinson, the U.S. Tax Court disallowed a charitable deduction to the donor’s estate because a charitable remainder annuity trust (a type of CRT) failed to make the required annuity payments to the donor during her lifetime, resulting in more benefits for the charity. The Tax Court noted that it is not sufficient to merely establish a trust with provisions that satisfy the CRT rules; those provisions must also be followed during the trust’s administration. This case should be viewed as a stark reminder that the terms of a trust must always be observed in order for the trust to achieve its intended tax result.
Trustees should therefore also be certain that all distributions are made in the appropriate amount and in a timely fashion (and that the checks are cashed by the recipient). Generally, donors and trustees should institute good record-keeping procedures at the outset to ensure a smooth and proper administration of a charitable remainder trust to its conclusion.
1. For example, in New York, upon termination, CRTs are required to file a final report with the attorney general’s office which consists of the Notice of Termination of Intervening Interests for Charitable Remainder Trusts (Form CHAR001-RT), a copy of the trust instrument and any amendments, waiver and release agreements signed by the trustee as well as the charitable beneficiaries, and finally, an informal accounting. Although New Jersey does not expressly require an accounting, the New Jersey attorney general’s office often will request one in connection with the termination of a CRT.
2. 309 F.3d 1290 (11th Cir. 2002).