Amplified Giving

Don't Forget about Liquidity!

[fa icon="calendar"] March 15, 2016 at 10:00 AM / by Renaissance

shutterstock_281556788In my previous post, I discussed how to properly evaluate the potential acquisition by a CRT of an illiquid position in a private equity investment, non-traded REIT, or limited partnership interest.  Today, I will cover the other three areas I always advise clients to evaluate with illiquid gifts: self-dealing, valuation and liquidity.

Self-Dealing

CRTs are prohibited from entering into a wide range of transactions with disqualified persons.  Disqualified persons include the CRT’s donors, trustees, certain family members of its donors and trustees, and certain businesses and trusts which these individuals in combination own or have a beneficial interest in. Accordingly, if it is expected that any business transactions will occur between the CRT and any of these parties, great care should be taken before making the investment. In addition, co-investment by a CRT in an enterprise founded by a disqualified person should be carefully scrutinized prior to making the investment. The IRS has held that co-investment between a CRT and a disqualified person is only permissible in very limited circumstances.

Valuation

In addition to the requirement that a donor substantiate the value of any contributed illiquid or unmarketable asset by means of a qualified appraisal, a CRT trustee will periodically need to value the CRT’s portfolio of assets— at a minimum once a year to compute the unitrust amount. In Treasury Regulations the IRS stated that where a CRT holds assets that cannot “be readily sold or exchanged for cash or cash equivalents,” i.e., unmarketable assets, the value of the assets must be determined by either an independent trustee or a current qualified appraisal. The regulation specifically lists real property, closely-held stock, and unregistered securities among the assets deemed to be unmarketable. One potential valuation challenge that a CRT trustee may face is that the Treasury Regulations do not explicitly bless the use of the NAV that FINRA now requires non-traded REITs to make available to their shareholders as an acceptable substitute for a qualified appraisal where the trustee is not independent.
Liquidity

Many of the assets described in the opening paragraph of this blog post are, by definition, not readily convertible to cash. While a CRT may receive regular cash distributions or have certain redemption rights, these sources of cash flow may be interrupted in periods of economic distress. Consequently, care should be exercised to make sure that if cash flow from such an investment is diminished or interrupted, cash will be available from other sources to make required distributions to the income beneficiaries and pay fees and other expenses of the trust.

Conclusion

Whether a CRT trustee should invest in a private equity investment, non-traded REIT, limited partnership, or other unmarketable asset is not a simple matter. Care must be taken to ensure that the investment is prudent, avoids tax and regulatory pitfalls, and does not impair the ability of the trust to meet its obligations to its beneficiaries and others. However, where appropriate care is taken, investment in an unmarketable asset may be appropriate.

Topics: Insider Tips