As real estate values have come back into prominence as a significant component of one’s net worth, real estate has increasingly become the asset of choice as the funding vehicle for use with the Charitable Remainder Trust (CRT). This brief article does not get into the various issues that one would need to consider, such as what to do with encumbered real estate and other issues, but it does touch on a couple of potential challenges and the solution for those particular challenges.
The majority of our non-profit clients are willing to serve as the trustee of CRTs; however, none of these clients are in the real estate business. Seldom do they have the in-house expertise to deal with these types of gifts, whether outright or in trust.
Consequently, there are challenges in dealing with gifted real estate. What do our non-profit clients do about potential environmental issues that are sometimes associated with real estate? What about marketing the property? What would be an appropriate price to ask? How aggressive should they be in trying to sell the property? What terms?
We at Cornerstone have often had the privilege and pleasure of working with our clients that have received gifts of real estate. When real estate is being considered as the funding vehicle for a CRT, we recommend the following:
Let the donor be his own trustee until the property is sold at which time he/she would resign in favor of the charity becoming the trustee. By doing so we eliminate some of the challenges and create some benefits.
1. Any environmental issues are relegated to the donor. The title of the property is not tied to the charity, even as a fiduciary through the charity’s role as trustee of the CRT.
2. The donor, as trustee, decides when to sell and for what terms. There is no second guessing whether charity might have sold too soon or at some low price.
3. The charity becomes involved at the time that the assets become liquid.
4. Cornerstone supports the donor throughout the process to make sure that he or she is in compliance with IRS prescribed rules.
5. Cornerstone treats the donor/trustee as our client. We provide all of the same services that we would provide to the charity client and at the cost that we would otherwise charge the charity.
6. While wearing the new trustee hat, the donor has no more responsibility than he or she would have had if the property remained in his or her name, with the exception that he or she must keep trust assets separate from personal assets. The donor provides Cornerstone with expense/income information as he or she provided to his or her accountant prior to contributing the real estate to the CRT.
As we have stated earlier, this solution has been successfully accomplished many times over the years. We have assisted many donors who have funded a CRT with appreciated real estate, acted as the trustee until the property sells, then resigned as trustee in favor of the charity. Cornerstone’s assistance helps ensure this is a seamless process. We at Cornerstone would love to support you if you have a situation where this particular solution might be considered.
Ray Tyler is one of the founders of Cornerstone Management and currently serves as President. He spends much of his time providing deferred gift consulting to Cornerstone’s clients.