Question: I gave my alma mater the remainder interest in my charitable remainder trust (CRT) but they recently hired a new president and I’m not happy about the direction she’s taking the university. On top of that, I have had some conversations with the advancement office recently, and am less than thrilled at their plans for spending my money—we had discussed improvements to the physics lab, but now they want to use the money to build a student center. At this point, I would like to move my money over to another charitable beneficiary. What recourse do I have?
Answer: As the man says, it depends. It depends on the state in which the CRT was entered into, and it depends on how your trust document was originally structured. The IRS allows the grantor of a CRT to reserve the right to substitute another charitable organization for the one currently named as the remainder beneficiary of a CRT. (The donor can grant the same rights to the trustee and the income beneficiary.) Trust documents usually address whether or not the charitable designation is revocable, so get that thing out of the filing cabinet and give it a close reading. If the charitable designation in your trust is revocable then you may of course “revoke,” or take back, the gift of the remainder interest to your alma mater at any time.
Some CRT trust documents contain a provision giving the trustee the right to reform the trust. But here’s the catch: even if your trust document contains such a provision, the right to reform can usually be exercised only in the case of an invalid CRT—one which does not meet the CRT requirements under IRC Section 664.
Beyond that, there is not much you can do to force a transfer, since a CRT is binding on all parties. A change to the trust terms will probably require some form of judicial proceeding, at which point the courts will apply the appropriate state law. While state laws differ, it is a given that you will need a good reason for changing the remainder beneficiary and amending the CRT. Not liking the new university president may not be sufficient, but not liking the way they propose to spend your money just might be, although this is tricky to prove in court.
Assuming you had the foresight to indicate in your CRT document how your alma mater should (a general indication with no binding obligation) or must (a legally binding requirement) spend your bequest (i.e., on improvements to the physics lab), you may still have to provide the court with solid proof that your alma mater is planning on using the funds otherwise (i.e., to build that student center). This will probably be an uphill battle and you should be prepared for your alma mater to fight you. It may therefore be worthwhile to try to negotiate some sort of deal with all of the trust beneficiaries to keep out of court. For instance, the university could agree to surrender half of the remainder interest to the charity of your choice in exchange for your agreeing to stop hounding them about the student center.
The best way to avoid this problem is, of course, planning. You can draft your CRT document such that you retain the right to change the beneficiary at any time to another charitable organization. By doing this, you will receive an income tax deduction for the value of the remainder interest upon funding the CRT, subject to the usual limitations, while leaving yourself some flexibility in designating the ultimate charitable recipient. In order to avoid running afoul of the technical CRT rules, this should only be done with the advice of knowledgeable counsel.
Another option would have been to have established a private foundation and designated the foundation as the remainder beneficiary of your CRT. Keep in mind, however, that there are higher costs involved in setting up and administering a foundation, and contributions to private foundations are subject to more stringent contribution limitations for income tax purposes.
Karlylle U. Youngman is manager in the Washington National Tax, Personal Financial Planning Practice of KPMG LLP. For more information on the contents of this article or the services KPMG provides to high net worth individuals, charities, and private foundations, please contact Ms. Youngman at (202) 533-6030. The Q&A presented here is illustrative only, and should not be considered tax or legal advice. If you need advice regarding the establishment or maintenance of a trust or private foundation, please consult with a qualified tax attorney or tax advisor.