"largely for your own benefit"

Yet another interesting discussion the other day on the gift-PL message board over at NACGP.

The question was whether, assuming your org was willing to undertake to act as trustee of a charitable remainder trust of which it is the remainderman at least as to part, whether you should charge a trustee's fee, and if so how much.

The specific context in which the question arose was that the org had already accepted the role, in a trust in which they had only a fifty pct. remainder interest. And they were taking a modest fee. Whereas with trusts in which they were the sole remainderman they did not.

The querent was asking what others are doing in this space and what their thinking was.

One of the more thoughtful responses was to the effect that (a) you might want to take on the role in order to better monitor your interests, but (b) this does also mean taking on a fiduciary responsibility toward the noncharitable beneficiaries, even if as a practical matter you are farming out the investment management piece, and (c) there will be a significant commitment of staff time, so (d) of course it makes sense to charge a fee.

All of which makes perfect sense. But your correspondent felt it was also important to mention that, at least in the particular case, there was some possibility any trustee fees might be treated as unrelated business taxable income.

There are letter rulings that might seem to suggest that the remainder charity will not incur UBTI by charging fees, to administer a trust of which it is the remainderman, but on closer reading these rulings do not actually quite say that.

The letter rulings in question have to do with what used to be called a "Harvard" CRT before everyone else started getting in on the act.[fn. 1] The idea is that the remainder charity as trustee will invest CRT assets in "units" of its own endowment fund, allowing the CRT to participate indirectly in investments that would otherwise generate UBTI.

The central question in these rulings was whether the "unit" participation model would in fact shield the CRT from the tax character of yields on the underlying investments. But in each case the question of fees was also mentioned.

And in each case, IRS said (a) well, you are doing this "largely for your own benefit," rather than as a commercial enterprise, but also (b) in fact you are only passing through fees charged by a third party investment manager, not charging fees on your own, so no problem.

A very small handful of these rulings involved CRTs of which the trustee was the remainderman as to only half, and in exactly one case even less than that.[fn. 2]

But the more formal sources on this question, typically cited in these rulings, are

• Rev. Rul. 69-528, saying that an entity providing investment management services to (c)(3) orgs for a fee could not itself qualify as exempt,
• Rev. Rul. 71-529, saying an entity providing similar services below cost, deriving most of its funding from grants -- and crucially, controlled by the participant orgs -- did qualify as a (c)(3).
• Rev. Rul. 72-369, saying a similar entity providing services at cost, but not controlled by the participant orgs, did not qualify.

Here of course we are not talking about a situation in which trust administration is the org's primary activity, reg. section 1.501(c)(3)-1(a). Instead the focus is on whether the activity is sufficiently related to its exempt function, reg. section 1.513-1(a). We not looking at a revocation, in other words, simply UBTI.

In short, your correspondent would caution that administering a trust of which some other org has more than an insubstantial piece of the remainder could be seen as an unrelated activity, and some portion of the trustee's fee could be taxed as UBTI.

[fn. 1]

These date back to PLRs 200352017, 018, and 019. At the time, Harvard was treating the passthroughs as ordinary income regardless of the character of the income to the endowment itself, and was not charging a management fee.

Those rulings also allowed Harvard to invest lead trusts in the same manner. But in a series of related letter rulings several years later, PLRs 200702036, 040, and 041, IRS retreated from that position in order to take the matter under further study. And of course we have heard nothing since.

[fn. 2]

For the curious, this was PLR 201208038, in which the trustee was the "primary" remainderman, meaning it had a larger share than anyone else. Which if there were multiple remaindermen could be a rather small fraction.

Other rulings involving fifty pct. remainders include PLR 201408034, PLR 201311036, and PLR 201218015. In each case there is a companion ruling issued to the CRT itself on the question about tax attributes passing through.