In 1997, Congress cracked down on a popular tax shelter that allowed rich people to take advantage of the exempt status of charities without actually giving away much money. Individuals who had already set up these vehicles were allowed to keep them. That included Mitt Romney, then the chief executive officer of Bain Capital, who had just established such an arrangement in June 1996.
The charitable remainder unitrust, as it is known, is one of several strategies Romney has adopted over his career to reduce his tax bill. While Romney’s tax avoidance is legal and common among high-net-worth individuals, it has become an issue in the campaign. President Barack Obama attacked him in their second debate for paying “lower tax rates than somebody who makes a lot less.”
In this instance, Romney used the tax-exempt status of a
charity -- the Mormon Church, according to a 2007 filing -- to
defer taxes for more than 15 years. At the same time he is
benefitting, the trust will probably leave the church with less
than what current law requires, according to tax returns
obtained by Bloomberg this month through a Freedom of
Information Act request.
In general, charities don’t owe capital gains taxes when
they sell assets for a profit. Trusts like Romney’s permit
funders to benefit from that tax-free treatment, said Jonathan Blattmachr, a trusts and estates lawyer who set up hundreds of
such vehicles in the 1990s. “The main benefit from a charitable remainder trust is the
renting from your favorite charity of its exemption from
taxation,” Blattmachr said. Despite the name, giving a gift or
getting a charitable deduction “is just a throwaway,” he said.
“I used to structure them so the value dedicated to charity was
as close to zero as possible without being zero.” ...
Romney’s CRUT, which is only a small part of the $250
million that Romney’s campaign cites as his net worth, has been
paying him 8 percent of its assets each year. As the Romneys
have received these payments, the money that will potentially be
left for charity has declined from at least $750,000 in 2001 to
$421,203 at the end of 2011. ...
Romney’s trust was projected to leave to charity an amount
with a present value of a little less than 8% of the
initial contribution. ... Thus, the specifics of Romney’s trust wouldn’t have passed legal
muster if it had been set up 13 months later. ... Because the trust’s investments have been earning a return
far below its annual payouts to the Romneys, its principal has
In 2001, five years after it was established, the trust had a value of between $750,000 and $1.25 million. Since then, it has pursued a conservative investment strategy -- regardless of the ups and downs of the stock market -- buying a mix of money- market funds, federally-backed bonds and federal bond funds. Since 2007, it has moved its assets entirely into cash. By 2011, its investments earned a return of $48, down from between $60,001 and $100,000 in 2001. It paid $36,696 to the Romneys in 2011.
The current investing strategy favors the Romneys over the charity because they get a guaranteed payout. ...
If the CRUT maintains the same investing strategy, assets
will continue to shrink, said Jerome M. Hesch, a tax and estate
planning attorney at the law firm Carlton Fields. The trustee
acted prudently in protecting against losses during a stock
market decline, he said.Nevertheless, “what’s going to go to charity is probably
close to nothing,” Hesch said.