Pension option

Trust bonus can benefit employee, charity.

To the editor,

I saw your reference [Pension puzzle: Part 1, Nonprofits face tough choices in selecting retirement plans, Philanthropy Journal, 03.25.04) to a nonprofit in San Diego that has added a Section 457 plan to its retirement plan offerings for the purpose of boosting the retirement income of its CEO, who is (apparently) near that point.

I would like to suggest that all nonprofits should at least be considering another strategy to get to the same place but with a more favorable end result.

In essence, all the money spent on all retirement plans is just that:  spent. It’s gone. Depending on the structure of the payout mechanism, after the primary beneficiaries’ lifetimes, whatever is left either goes to heirs or the pension company.  As I noted, it’s gone.

The charity could use another alternative that is much more attractive, in my view, and would mean that – with careful stewardship – the charity could get their money back and more.

In addition, there are no rules that encumber this strategy with respect to how much is set aside to produce retirement income, when income can or must be taken, or to whom the plan must be offered.

And, should the employee decide to do a little consulting after retirement, and want to add to the retirement fund, he or she can do that – as could any future employer.

Simply put, a charity can work with a valued employee to create and fund a charitable remainder unitrust (Type II, or NIMCRUT form works best, but a FLIP CRUT can also be used).

To make this work, the charity pays a bonus to the employee to be placed in a trust, and also will usually pay an additional bonus to cover whatever income tax will be due on the money placed in the trust.

The CRUT is written so as to irrevocably vest the remainder interest with the charity, which usually also acts as trustee.

Until retirement, either investments that grow in value and produce no ordinary income are used, or a tax-advantaged insurance product – usually a variable annuity – is purchased to allow compounding of the trust corpus (tax free).

At retirement, the trustee can change the investments so as to pay trust income to the then former employee – and to the employee’s spouse if there is one – for life.

At the conclusion of the trust term (when all income beneficiaries are dead – the trust has “matured” as we say), the corpus of the trust is paid over to the charity as a gift.

I know that Section 403(b) and other retirement plans have great advantages, and I often suggest those advantages to clients and advisors.

The “Retirement Unitrust” has great advantages, too, and one is that the money used to generate the income comes back to the charity . . . a feature not shared by the other plans.

Steven L. Mourning, executive vice president and director, philanthropic services, Kelmoore Investment Co., Palo Alto, Calif.

Leave a Response

Your email address will not be published. All fields are required.