Though he first attended the Hollywood Bowl more than 30 years ago, Ron Moormeister remembers well those Los Angeles Philharmonic concerts. His voice waxes rhapsodic as he recalls the lineup: Mandy Patinkin, Julie Andrews, a Tchaikovsky Spectacular complete with the bombastic 1812 Overture.
So when he hit it big in 1995 — selling his insurance brokerage firm at age 49 — he decided to help the orchestra and get a tax benefit at the same time. He used a Charitable Remainder Trust (CRT). This creative strategy enabled him to donate his money to a cause, yet still derive funds from it based on a mix of tax deductions and investment.
He started the trust with approximately $350,000. “I had to get used to the idea a little bit,” says Moormeister, 64. “I thought, ‘Gosh, do I want to give away this money?’ But I wasn’t just giving it away. It was going to work well for me, for others and for my family.” He also wanted to protect his assets from the claims of creditors or lawsuits, equally important factors in his decision to implement a CRT.
So far, all has worked out well. Moormeister set up his CRT with the help of Simon Singer, principal and founder of TheAdvisor Consulting Group in Encino, California. Under the trust guidelines, Ron guarantees that 25 percent of funds go to the Los Angeles Philharmonic. Yet in establishing the trust, Ron estimates that he’s saved at least $250,000 in tax deductions over time. His initial investment was sheltered from federal and state taxes, and trust money that’s invested grows tax free, much as it does in a retirement account.
This means Moormeister can make money off the CRT without expensive tax consequences. “I could use an investment counselor, but I control the investments myself,” he says, “and I can invest in virtually anything.”
Simply defined, a CRT allows you to transfer cash or assets to the trust — from which you may receive income for life or, if you prefer, a fixed term not to exceed 20 years. The income can be paid over your life, your spouse’s life and even the lives of your children and grandchildren. (The guidelines are outlined in IRS code section 664.) In essence, the trust takes advantage of the tax-exempt status of the nonprofit it benefits.
But experts warn CRTs demand a high degree of planning and attention to the fine points of tax law. “There are many, many tricky rules that apply to charitable remainder trusts,” says Jonathan Blattmachr, a director of Eagle River Advisors in New York City. “So you have to go to people who know how to do it, and can continue to monitor it.” Lawyers, financial planners and accountants help set up CRTs.
What’s more, CRTs are irrevocable; once you set it up, it cannot be terminated, says Dan Nigito, CFP, author of “The Power of Leveraging the Charitable Remainder Trust.” “Your desire to create a charitable legacy should override the tax incentives.”
The ideal candidate would have highly appreciated assets — say from the sale of property or a business — that are not a core nest egg, but rather money set aside exclusively for the CRT. “You have to have sufficient assets to give away, and the assets have to make sense,” points out Grant Rawdin, president of Wescott Financial in Philadelphia, Pennsylvania.
Because CRTs are little known outside the financial and estate planning community, you also need someone who is knowledgeable in this area. Moormeister had no idea what a CRT was until he talked to Singer.
“The most difficult part is not the strategy itself, but people getting the absolute clarity — getting their heads around it,” Singer says. “If you set up the trust correctly, there’s far more money to be made with the reduction of taxes than the investment income,” largely because the returns on investment from a CRT may be flat from year to year, depending on market conditions.
Indeed, the returns on CRT investments pretty much follow the rest of the market — and we all know how much malaise there is on Wall Street these days. “A CRT does not make a lot of sense in a low-interest rate environment,” says Susan Colpitts, executive vice president and co-founder of Signature in Norfolk, Virginia. She cites the fact that investment tax breaks are pegged to the Applicable Federal Rate (AFR), currently 1.4 percent, as an assumption of how the trust will grow over time. “So in today’s environment, the tax deduction will be very small because the growth rate is deemed to be so much lower than the payout rate.”
Yet with all the talk of closing Bush-era tax loopholes, the Buffet Rule and the possible expiration of generous estate and lifetime gift tax exemptions in 2013, CRTs look set to maintain formidable tax advantages, since they can shelter highly appreciated assets from a one-time tax hit on the federal and local levels. According to Blattmachr, "they will actually look better if and when the Bush Tax Cuts expire. If we’re not talking a 15 to 16 capital gains tax, but a 24 percent capital gains tax, then the charitable remainder trust shines.”
For Moormeister, the best advantages outweigh anything on an accountant’s spreadsheet. These days when he visits the Hollywood Bowl, he’s got a garden box about 16 rows back, left of center, where he loves to hold court with family and friends. (He pays full price for his seats.) The outdoor concerts still thrill him much as they did three decades ago, but he gets an extra rush knowing his good financial fortune will help the music play on.
“I have no musical ability whatsoever but I enjoy the heck out of it,” says Moormeister, who adds with a bit of impish humor: “It was a somewhat selfish thing I did. The Philharmonic hasn’t benefitted from it yet. Nothing comes to them until I leave the planet.”
