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.
This is Part 2 of the newsletter on charitable remainder unitrusts (“CRUT”) which is a common planning technique for the charitably inclined high net-worth family. 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.
As covered in Part 1, 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.
While we believed the 2019 CRUT tax return would end our dealing with the CRUT Professionals, we were sorely mistaken as these dubious CRUT Professionals somehow erroneously filed a 2020 CRUT tax return allocating income to the Estate, despite the Estate receiving no distributions in 2020 and its lifetime split interest terminating with the final distribution in 2019.
In sending us a draft of the 2020 CRUT tax return, the CRUT Attorney stated that the CRUT Accountant had already been paid a significant sum for the erroneous 2020 CRUT tax return and that if we had any questions or changes, the CRUT Accountant would continue to charge. This was certainly an interesting posture by the CRUT Professionals given the significant mistakes on the 2019 CRUT tax return and the fact that we had to instruct the CRUT Accountant what to input on each line of the return to get the correct result.
We informed the CRUT Professionals that the 2020 CRUT tax return was erroneously prepared, that the CRUT Accountant needed to refund the fees received, and, since the lifetime beneficiary received no 2020 distribution from the CRUT and its interest terminated in 2019, that it was erroneous to allocate 2020 income to the lifetime beneficiary. Instead of admitting they erroneously prepared the 2020 CRUT tax return, the dubious CRUT Professionals moved forward with filing the 2020 CRUT tax return anyway, retained a litigation attorney (even though both trustees were attorneys), and purchased a tail insurance policy further depleting the assets of the CRUT designated for charitable causes.
In order to prevent this erroneous 2020 income allocation to the Estate from depleting the assets going to the charitable beneficiary, the Estate had to file an inconsistent treatment statement to the CRUT K-1 with the Internal Revenue Service and go into detail about the shocking actions of the CRUT Professionals.
While the issues with these CRUT Professionals went further than incompetence, we have seen this over-allocation of income to lifetime beneficiaries of a CRUT on repeated occasions. Usually, it is not a question of the competence of the estate planning attorney or the tax preparer, it is the lack of experience in executing the proper reporting to carry out the income tax benefits of the CRUT planning. It is important to have professionals that understand not just how to plan with a CRUT, but to report the actual benefits correctly so enormous 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.