Special Report-Planned Giving

January 1, 2001       Clint Carpenter      

Can a nonprofit really cash in on a divorce by using a charitable remainder trust (CRT) as a way for a donor to pay alimony? According to Joseph O. Bull, director of planned giving for Ohio State University in Columbus, the answer is yes.

During the recent 13th annual National Conference on Planned Giving in Orlando, Bull retold the case of an OSU alumnus who established a nine-year CRT to pay his alimony.

Bull said the donor told him he paid $9,000 a month, and it was becoming increasingly burdensome to deal with his ex-wife and her attorney. According to Bull, the woman wanted the alumnus to buy a life insurance policy to guarantee the alimony payment. The donor asked if he could place stock in a start-up company that was going public into a CRT and have the payments equal alimony payments.

According to Bull, he never likes to tell a donor that something can’t be done. But in this case he wasn’t sure if what the alumnus was asking was possible and needed some background information before guaranteeing anything.

Bull gathered statistical data from 1935 through the mid-1990s and found that the median age of first marriages has gone up five years for both men in women – to 27.1 years for men and 24.8 for women. "People are delaying it longer," he said. "I’ve seen some demographers talk —— this is a particularly interesting thing for planned giving people —— the people we deal with now are those baby boomers or people who grew up maybe in the Depression, or thereabouts, who keep talking about their Golden Years."

Because people are getting married later in life, Bull said the so-called Golden Years are being front loaded in many cases. Additionally, there has been an increase in the number of unmarried couples. Today, more than one-third of those between the ages of 25-34 have never been married, according to U.S. Census Bureau data.

Also, the sanctity of marriage isn’t taken as seriously as in the past, and therefore, divorces are more common in today’s society. Being divorced doesn’t hold the stigma it had in the past, according to Bull.

Whatever the case may be in today’s society, Bull explained that there are three levels of analysis that must be examined to see if a planned gift trust can be set up.

Gift tax issues

"In this case they’re no longer married. So he (OSU alumnus) set up a CRT for his wife — the marital deduction doesn’t come into play because the marital entity is broken," Bull explained.

Now, the general rule of thumb if there is a transfer of assets without full and adequate consideration, the gift tax is applicable unless there’s an exception — with the marital deduction being one of those, Bull added.

He continued, "There are a couple of other exceptions to this general rule. One, if you relinquish your support right, if the wife in this case were to say ‘I (went) to court and relinquished my right to receive this alimony in exchange for this CRT,’ it is possible that the gift tax could be avoided."

That situation must be dealt with carefully though, because you only avoid the gift tax to the extent of the value of the right that’s relinquished. If a court were to decide that the value of the alimony was less than the value of the CRT you’d still have some gift tax for the difference. "CRT payments must equal the value of the alimony rights to make this happen," Bull explained.

Next, there are grantor trust rules that must be followed, according to Bull. However, as there is no existing legal obligation during the property settlement negotiations. The grantor trust rules should not apply, he said.

"Grantor trust rules were put into the code to prevent high-bracket taxpayers from shifting income to lower-bracket taxpayers by the use of a trust," he said. "The trick was the high-bracket taxpayer sets up a trust and has complete and utter control over the trust. That income was taxed at the lower bracket yet the grantor had the control over everything."

The private foundation rules also have no legal obligation until the court enters the divorce decree. If the CRT is entered into prior to the final settlement agreement, the CRT should not be mentioned in the settlement agreement so as not to rise to the level of a legal obligation, Bull explained.

"If the CRT is mentioned in the settlement agreement to take advantage of the special gift tax and grantor trust rules, an analogous argument could be made for the non-applicability of the private foundation rules, even though no such specific rule exist," Bull said. "Private foundation rules prohibit certain activities between a private foundation and insiders to that private foundation."

Consequences

Bull said the OSU alumnus would incur a variety of taxes if he established a CRT and granted his ex-wife the beneficiary. "Like Sean Connery… I never say never," Bull said. "Now it’s not that I’m going to tell a donor you can do something illegal, but there’s more than one way to skin a cat."

So what did Bull tell the OSU alumnus?

"I said why don’t you establish a CRT? You’ve got a nine-year alimony obligation, set up a nine-year CRT. Name yourself as the recipient of the income — you get a check monthly from the trust, you turn around and write a check to your ex-wife," Bull said he suggested.

"Now that allows you to get rid of your low-basis, highly depreciated stock, it allows you to make a wonderful gift to our university, with which he was in the middle of being solicited for," explained Bull.

The only thing it doesn’t do is allow the alumnus to break ties completely with his ex-wife and attorney, but it’s closer to what he was seeking.

Bull said he told the alumnus, "There’s at least something good that’s going to come out of this (divorce). There’s going to be an endowment at an institution that you care (about) and there’s students who are going to school through the scholarship, which you’ve endowed."

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