Green Bay , Wis ., winters motivated Steve Seidl , CCIM , to explore living in Florida , which led to realizing the value of charitable remainder trusts .
Photo by Images by K the nuances of a charitable remainder trust ( CRT ) as an alternative .
The CRT code of the IRS has been in place since 1969 , with section 664 providing for this split-interest trust to benefit both qualified charities and the donor .
Our Loggerhead Cay condo was a textbook candidate for the charitable remainder trust because it was highly appreciated , highly depreciated , and underperformed as an investment asset . After 25 years , the mortgage had been fully amortized , so the property was free and clear . Any remaining debt may have been subject to forgiveness and thus taxable . ( Consult your attorney for specifics about your situation .)
I was fortunate to make the acquaintance of Lowell Shoenfeld , a Florida board-certified will and estate attorney who specializes in such deferral products . Lowell guided us through the process and created the charitable remainder trust for my family .
In our personal trust , we had provisions for charitable donations at the time of our deaths to the usual beneficiaries — the Scouts , our church , our alma maters , etc . Those collective donation amounts totaled approximately $ 350,000 . Lowell rewrote our personal trust and moved those beneficiaries into the newly formed charitable remainder trust . Lowell also connected us with the South Florida Foundation , now known as the Collaboratory , a two-building , 24,000-sf center in Fort Myers providing collaborative office space for nonprofits and a technology hub that will be available to both residents and businesses .
For the CRT to provide annual distributions , it must be liquid . The trust had to be funded by the sale of the asset . The proceeds of the sale were approximately $ 700,000 and deposited with the Collaboratory , with approximately half the balance of the trust coming to our benefit over a 20-year period . Using my trusty HP 10BII calculator , I calculated the annual payout to us from the
For the charitable remainder trust to provide annual distributions , it must be liquid . The trust had to be funded by the sale of the asset .
trust that would amortize its balance over the 20-year trust period to approximate the $ 350,000 distribution . The payments to our family diminish over that period , but still outperform the asset that was liquidated to accomplish our goals .
The liquidated funds are in complete control of the Collaboratory and invested under its guidelines . Reports , tax filings , distributions , and K-1s are its obligation . A lengthy look back of its fund ’ s performance indicated an average annual return of approximately 8 percent . With our family receiving 10.75 percent of the declining balance annually for the next 20 years as set forth in the CRT documents , our initial annual distribution is in excess of $ 70,000 . This amount that is subject to taxation , though distributions from the trust are taxed favorably and average below ordinary income tax rates . Interest and dividends earned from the investment vehicle are taxed ordinarily , but additional funds paid out are taxed at capital gain rates .
At Lowell ’ s suggestion and with the foundation ’ s reluctance to manage the property , I was named the interim trustee during the sale period . To do so , a separate bank account was created to segregate the rents and expenses of the property from our personal accounts . We proceeded to list the property at $ 799,900 upon the recommendation of a local island REALTOR ®. An agonizing COVID-19-related 22 months later , we accepted an offer that netted us the approximate $ 700,000 .
Upon the effective date of the funding , I assigned my trusteeship to the Collaboratory , thereby ending our Loggerhead Cay chapter .
Additionally , the donation qualified for a one-time tax deduction dependent on the estimated residual value of the trust at its termination . Because the property was donated to the trust a year prior and before its sale and liquation , we were able to deduct approximately $ 85,000 that tax year . The process required a certified appraisal to determine value at the time the property was placed into the CRT , with an independent appraisal indicating a value of $ 775,000 . The deduction is determined by the estimated residual ( remainder ) value of the trust ( the donation ) and the IRS “ hurdle rate ,” which is determined monthly in accordance with section 7520 of their code . ( I highly suggest your legal team make this determination .)
In the end , we rid ourselves from the management of our condominium , received an immediate income tax deduction , and established a significant cash flow from the property in the form of an annuity for the next 20 years that comes to us while also solidifying our intent to our beneficiaries .
While snow and cold were the motivating factors back in 1996 , we no longer have to endure winter ’ s wrath as we split time between Fort Myers and Green Bay — only enjoying winter ’ s elements when we are north for the holidays .
Steve Seidl , CCIM , SIOR Managing broker , Seidl & Associates
Contact him at steve @ seidlandassociates .
CIREMAGAZINE . COM COMMERCIAL INVESTMENT REAL ESTATE MAGAZINE 17