In 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
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.
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