Investing Charitable Remainder Trusts In The Michigan Endowment Return Strategy
What are the implications of the private letter ruling (PLR) that the University of Michigan recently received from the Internal Revenue Service (IRS)?
Previously, charitable remainder trusts (CRTs) for which the University serves as trustee could not be invested with the endowment in the University’s long-term portfolio due to potential negative tax consequences. The PLR that Michigan received provides that certain eligible CRTs can now be invested in the same investment pool, known as the Long Term Portfolio (LTP), as the university endowment. This new CRT investment strategy, called the Michigan Endowment Return Strategy (MERS), will provide these trusts with the benefit of broader diversification through multiple asset classes and a wide array of investment managers, leading to potentially higher returns.
What is the primary advantage of this new investment strategy?
The payout to the beneficiaries of a charitable remainder unitrust is calculated annually as a set percentage of the value of the trust’s assets on its annual valuation date (usually January 1). When the value of the trust assets increases, so does the payment to the lifetime beneficiaries. Thus, the primary advantage of MERS over other investment strategies is the expected outperformance of the Long-Term Portfolio over a longtime horizon. While such outperformance has occurred in the past (see chart below), it cannot be relied upon as a predictor of future performance. This outstanding performance could produce higher beneficiary payments over the long run and a larger remainder benefit for the University.LTP: Long-Term Portfolio lagged performance. The 80/20 portfolio represents a generic custom benchmark for the LTP consisting of 50 percent S&P500 (domestic equities index), 30 percent S&P/Citigroup BMW World ex-US (global, non-US equities index), and 20 percent Lehman Aggregate (fixed income index)
Please note: The overall investment performance for trusts invested in MERS will not exactly reflect the LTP return because of cash holdings of participating trusts and other reasons specific to each trust.
What trusts are eligible to invest in MERS?
The trust must be a qualified charitable remainder trust (i.e., a charitable remainder annuity trust [CRAT] or a charitable remainder unitrust [CRUT]) that irrevocably names the University of Michigan as the sole remainder beneficiary and for which the University serves as trustee. Generally, the option to invest in MERS will only make sense for CRUTs, where the potential for a higher MERS return will result in higher payouts over time for the lifetime beneficiaries.
CRTs that have already been established outside the University of Michigan may still be able to benefit from MERS if Michigan is designated to act as successor trustee and if the entire charitable interest is irrevocably designated for the University. For more information on CRTs, please visit Ways to Give, or contact the Office of Gift Planning at (866) 233-6661.
Which CRTs are best suited for MERS?
As mentioned above, generally CRUTs are better suited for MERS as the annual payments increase with annual increases in the trust’s value, whereas payments from CRATs remain the same no matter the investment performance. Additionally, a greater portion of the payments to beneficiaries will be ordinary income, which is taxed at the beneficiary’s highest marginal tax rate. It is those trusts with a longtime horizon, therefore, that will benefit sufficiently from the anticipated greater investment returns to result in larger cumulative after-tax income for lifetime beneficiaries and larger remainder for Michigan.
Who should I contact if I am interested in setting up a new charitable remainder trust or converting an existing CRT that will be eligible to invest in MERS?
Please contact the University of Michigan Office of Gift Planning at (734) 615-2022 or toll-free at (866) 233-6661. You may also e-mail the office at giving2@umich.edu or use our on-line contact form.
Office of Planned Giving
University of Michigan Office of University Development
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