I've seen a number of diaries of the past two weeks regarding charitable remainder trusts, particularly as a sinister, tax-evading loophole being exploited by Mitt Romney.
Here's the real deal ...
In a diary tonight (I'm having trouble hyper-linking; the diary is this one: http://www.dailykos.com/...), kossack kavips suggests that Mitt Romney has funneled his billions into a charitable remainder unitrust (CRUT), a sham charitable entity which purportedly really functions as a tax shelter. Kavips alleges that Romney has avoided paying taxes for the last decade plus, implicitly suggesting the CRUT enabled him to do so.
I don't think that's the case. Here's why:
First, by way of background, I am a trust administrator, working exclusively with charitable remainder trusts, with more than a decade of experience. CRUTs were not killed in 1997, as suggested in kavips' post, but they were reformed, with additional language added to the tax code to clarify previously ambiguous areas. Since then, CRUTs have become a popular charitable vehicle that allow donors to make larger gifts to charity than they might otherwise have been able to make, by providing a more secure retirement and some tax benefits. Life income gifts, which includes CRUTs as well as gift annuities and bequests, typically account for 40% of the dollars raised in major fundraising campaigns (such as for colleges/universities, charitable foundations, civic organizations and large national nonprofits). That's why CRUTs are particularly popular with upper middle-class donors who might not be able to afford to make large outright gifts.
But CRUTs only make financial sense if there is philanthropic intent. The benefits simply do not outweigh the costs otherwise.
Here's how a CRUT works: A donor makes a large gift to a charitable remainder unitrust. If the donor uses appreciate securities (such as stocks, bonds or mutual funds), he or she can reduce and defer (but not eliminate) some of the capital gains tax that would otherwise be due on those assets. I'll explain how this works in a minute.
In most iterations, for every year the donor lives, the trust pays him or her a certain percentage of the trust's value. For instance, if a trust pays 7% to the donor and the trust was worth $100,000 on Jan. 1, then the trust would pay the donor $7,000 over the course of the year. Then the trust would re-value itself again the following Jan. 1, and pay 7% of that new value to the donor the following year, etc). When the donor dies, whatever money is left in the trust goes to a predesignated charity.
CRUTs are designed with an understanding that their value may decrease over time. In a sense, they are a hedge: the longer he or she lives, the smaller the gift to charity may be, but the longer the trust will provide for hm/her in retirement. In ideal market environments (read, pre-GWB years), trust would grow by an amount larger than the trust payment due the donor, and so each year the trust was worth more. With the challenging equities and bond markets since 2007, most CRUTs have declined in value each year. That's just the nature of the market environment now. Romney's CRUT allegedly declining from $750,000 to $421,000 is well within the norm. in 2008 alone, most trusts saw their value cut in half.
Kavips also states that when it comes to Romney's CRUT, "Any capital gains are non taxed because of the charit[y']s status." This isn't exactly true, though one could be forgiven for reaching that conclusion. Here's how the tax-benefit component works for CRUTs:
The donor doesn't pay any taxes for the stocks/mutual funds he used to fund the trust. However, while the trust itself is a charitable entity and doesn't pay any taxes, every payment the trust makes to the donor is taxable to the donor. In short, over his/her lifetime, the donor will have either a.) paid the taxes that would otherwise have been due on his donated securities, or b.) died before he could pay all of the taxes due, in which case the charity would receive an even larger residual gift. If Mitt Romney has a CRUT, then he's very likely paying at least some taxes.
On top of all that, there's also a "charitable deduction" benefit associated witrh CRUTs too, but her again, the benefit is limited.
Gifts to CRUTS are irrevocable. Once a gift has been made, the money cannot be returned to the donor, except through the trust payments. Because they're irrevocable, the donor can claim a charitable deduction in the year he makes the gift to his/her CRUT. However, unlike outright gifts, donors can only get a partial charitable deduction for CRUT gifts, equal to the portion of his gift that he won't get any benefit from. For instance, if a donor gives $100,00 to his CRUT, and the financial calculations indicate that the donor would earn in trust payments over his lifetime the equivalent of $60,000 is today's dollars, then the donor could only claim a $40,000 deduction ($100,000 gift, less the $60,000 benefit).
CRUTs are not an efficient vehicle for unscrupulous financiers for generating charitable deductions or for sheltering taxes, or, for that matter, for passing assets on to heirs. They do provide some benefits, but unless one's primary purpose is to give money to charity, there are much better options out there.
Mitt Romney's entire portfolio as a presidential candidate seems built upon cynical schemes and questionable investments. But if he does indeed have a charitable remainder trust, the its true purpose is to give money to the Mormon church, not avoid paying taxes.