Background: A New Approach to Trust Design
Renaissance has largely been responsible for the development and promotion of the use of a deferred annuity contract to defer and control income flow in a Net Income with Make-up Charitable Remainder Unitrust (NIMCRUT). A brief review of how this powerful approach to trust design was developed is helpful in understanding important features of an annuity product- the subject of the Charitable Remainder Trust Annuity Investment System, but also the importance of critical trust language and proper administration.
In 1987, Renaissance began operation and has become the largest independent company devoted to the design and administration of charitable remainder trusts. That same year another company, CAUS Inc., began to consider the feasibility of using deferred variable annuities as investment instruments within charitable remainder trusts, particularly for the purpose of deferring income earned by the trust.
A combination of a deferred annuity and specific trust language offered the solution to a problem that had perplexed many. That problem was that the income generated by a NIMCRUT fluctuated, sometimes dramatically, depending on the kind and quality of underlying investments and the performance of the investment market. For income beneficiaries who needed a specific amount of income from their trust on a regular basis, these trusts could sometimes provide an inadequate income stream or none at all. The problem was one of income control in an unpredictable investment environment. It was precisely this ability that made the annuity in a CRT so attractive. This combination seemed to offer a means for trustees of such trusts to manage or "regulate" income being generated within the trust, and even to "turn on" or "turn off" income that had been deferred, depending on their changing needs.
The only problem was that no one knew if this hypothetical charitable remainder trust design would be acceptable, since no such arrangement had ever come before the Internal Revenue Service for an opinion. Taking the lead, CAUS, Inc. submitted a request to the IRS for a private letter ruling. The subsequently issued IRS private letter ruling affirmed that the trust was a qualified charitable remainder trust, and paved the way for the development and marketing of this trust design.
As specialists in charitable remainder trusts, Renaissance and CAUS were very interested in applying this to CRTs. On the strength of that mutual interest, these two organizations decided to bring this concept to market. Renaissance provided additional legal research and developed specialized trust language to define distributable income in respect to a deferred annuity contract. This trust language was necessary because individual state Principal and Income Acts were silent as to the treatment of annuities in any type of trust. Because distributions from a deferred annuity contract are not considered a dividend, interest, rent or royalty under the various Principal and Income Acts, explicit language is required in the trust agreement to ensure the desired result.
Renaissance developed procedures for handling the administration and completion of tax returns that accounted for the income reported on 1099s, issued by the annuity company and received by the trust. Renaissance worked with annuity companies to help them understand the need for specialized product features and how to handle administrative issues.
The concept of utilizing deferred annuities to defer and control income within a NIMCRUT became a highlight of the training program offered by Renaissance.
With these programs in place, and PhilanthroTec software to illustrate the concept, financial planners began to embrace this powerful planning tool.
In the fall of 1997, an internal memo distributed by the IRS suggested the possibility of tax law abuse when the trustee of a CRT invested in an annuity contract to defer income. Renaissance immediately came to the front of an effort to educate IRS officials. Calling annuity product companies together for a meeting, plans were made to testify at IRS hearings.
As a result of information presented by Renaissance and others, the IRS has clarified its position on income deferral CRTs and the use of annuities to fund those trusts. The IRS has given the concept a second vote of confidence and when handled properly does not believe the strategy to be abusive to the tax code. (TAM)
All parties benefit from this application:
- For charitable remainder trust prospects, combining annuity products and charitable remainder trust design provide a level of flexibility in income control.
- For participating insurance companies, this approach offers a market for quality deferred variable annuity products that possess the right combination of features.
- For financial planners, this approach to trust design opens up a realm of problem-solving possibilities for prospects and existing clients.
