A Tale Where Professionalism and Competence Fail to the Detriment of the Beneficiaries
Prepared by Christopher Klug - Founder, Klug Counsel PLLC. To save or read this newsletter offline, click here.
A charitable remainder unitrust (“CRUT”) is a common planning technique for the charitably inclined high net worth. The CRUT allows for the tax-free liquidation of a highly appreciated asset, the tax-free growth of the assets inside the CRUT, with the income building inside the CRUT being taxed to the extent of distributions to the lifetime beneficiary. As compared to immediate taxation on the gain on the sale of a highly appreciated asset with after-tax proceeds being subject to tax annually, the CRUT can allow for superior returns where the distributions to the lifetime beneficiaries will occur over a sufficient period of time even though the remainder is distributed to charity. This is the power of tax-free diversification paired with tax-free growth inside the CRUT.
We represented a Corporate fiduciary who was the executor for an estate (“Estate”) of a decedent who was the lifetime beneficiary of a CRUT. During this representation, we had the unfortunate experience of having to deal with two attorneys, who were the trustees of the CRUT, and the accountant (collectively, CRUT Attorneys and CRUT Accountant, the “CRUT Professionals”) who prepared the annual CRUT tax return. More disturbing than the CRUT Professionals’ inability to understand the tax implications of the CRUT was the CRUT Professionals’ outrageous and cavalier behavior towards the beneficiaries including the waste of charitable assets for their own benefit.
The final distribution to the lifetime beneficiary (now the Estate) of the CRUT occurred in 2019. Due to poor drafting of the CRUT instrument by one of the CRUT trustees, an agreement had to be reached as to how to pro rate the final distribution to the lifetime beneficiary. Putting this issue to the side, the CRUT Accountant filed an incorrect 2019 CRUT tax return two times before we got involved, each time over allocating an enormous amount of income over the distributions received by the lifetime beneficiary. The result of such over allocation of income is funds that would otherwise go to charity tax-free, are now reduced by a significant amount of tax before being transferred to the same charity through the Estate.
When we were hired to assist, it became abundantly clear through our communications with the CRUT Professionals that they were clueless about the income tax implications of the CRUT. We had to go line-by-line with them and inform the CRUT Professionals of what to input on each line to get the correct allocation of income to the lifetime beneficiaries.
Throughout this process, the CRUT Accountant was missing in action. One of the CRUT Attorneys claimed that the CRUT Accountant was generally hard to reach and we believed this to be true after several failed attempts to reach him. After the correct 2019 CRUT tax return was filed, the CRUT Accountant finally emailed us stating that he would have finished the second amendment to the 2019 CRUT tax return two months earlier if someone would have just called him instead of communicating through e-mail. We found out that the CRUT Attorney who claimed that the CRUT Accountant was hard to reach shared office space with the CRUT Accountant, their offices were directly next to each other, and that they spoke to one another on a daily basis. We were surprised by their lack of professionalism, accountability, and adherence to common business practices.
We were relieved to know that since the lifetime beneficiary’s interest terminated in 2019 and the 2019 CRUT tax return was correctly marked final tax return, this would be the last time we would need to deal with the CRUT Professionals—or so we thought. Unfortunately, but not surprisingly, the CRUT Professionals somehow erroneously filed a 2020 CRUT tax return allocating income to the lifetime beneficiary after all of the work we put forth correcting their mistakes on the 2019 CRUT tax return. Some folks never learn! Stay tuned for Part 2 of this saga in our next Newsletter.
To get the full benefits of the CRUT planning, it is important to work with professionals who understand how to plan with a CRUT and how to correctly report the actual benefits so that vast amounts are not wasted needlessly on tax and go to the good causes intended through the charitable beneficiary.
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Christopher M. Klug serves clients with domestic and international taxation, tax controversy, corporate/business planning, mergers and acquisitions, cross-border transactions, and domestic and international estate planning needs.
Klug Counsel represents companies, start-ups, private equity funds, family offices, and high-net-worth individuals. Through their strategic partnerships with law firms and other professional service firms in the U.S. and around the world, they are able to meet the tax and business needs of their clients in the U.S. and internationally.