DATE: May, 2005

http://money.cnn.com/news/economy/#indicators

Help is on the Way for Mutual Fund Investors-in the Form of Lower Fees
Over the past year or so, hundreds of mutual funds, big and small, have moved to cut the fees they charge shareholders. Among them have been the three largest mutual fund companies: Vanguard Group, American Funds and Fidelity Investments. The price war means investors now have more low-cost options, giving them a chance to find better prices when looking for comparable funds.
Many investors don't think twice about the fees charged by their mutual funds, but in doing so, they are ignoring a critical van-able for determining how well they'll do on their investment. Fund expenses-which are expressed as an annual percentage of assets known as the expense ratio-are deducted directly from fund assets and essentially come out of investors' pockets. The higher the expenses, the less money returned to investors. In fact, a recent report on fund fees by mutual fund researcher Morningstar Inc. said that expense ratios "are the best predictor of performance-way better than historical returns."
Critics of the mutual fund industry say it's about time fees started to come down. Morningstar's Russel Kinnel says its study found that between 1989 and 2004 the average expense ratio for mutual funds aimed at individual investors edged up to 0.96% from 0.94%, once the data are adjusted to account for where investors have the most money. Though small, the increase is striking, Morningstar says. The reason: As a fund's assets increase, the cost of managing that money doesn't grow as fast, an effect called "economies of scale." And during the 15-year period in question, the amount of money invested in mutual funds soared to $6.2 trillion from $550 billion.
Wall Street Journal Sunday 5/8/05

Passage of Major Charitable Reforms by Memorial Day?
According to Capitol Hill staff, Sen. Chuck Grassley (R-Iowa), chair of the Senate Finance Committee, is seeking to have his charitable reform measures passed by Memorial Day. These measures likely will include:

It appears that Sen. Grassley will try to pass the charitable reforms by attaching them to the Charity Aid, Recovery and Empowerment (CARE) Act. AFP has strongly supported the CARE Act over the past four years because it contained several important charitable giving incentives such as the IRA rollover provision. However, if burdensome charitable reforms are added to the CARE Act, AFP will be forced to reconsider its position on the legislation. AFP is working with members of Congress to ensure that the CARE Act is introduced without any onerous reforms attached.
AFP news 5/2/05

Spousal Consent Required for Trusts (originally in April, 2005 edition but reprinted because of it's significance)
The Treasury Department and Internal Revenue Service issued guidance today to provide a safe harbor procedure to avoid the disqualification of a charitable remainder trust by reason of the existence of a spousal right of election under state law.The IRS released Rev. Proc. 2005-24 which will require donors in some (but not all) states to obtain a special spousal consent in order for charitable remainder trusts to be valid.

BaCKGROUND: If a person writes his/her spouse out of a will, the spouse can "elect against the will" and take one third of the assets. In some states, that right applies to assets placed into trust during a person's lifetime. Could it apply to a charitable remainder trust? The IRS just issued a Revenue Procedure that explains when this could be a problem that could disqualify a charitable remainder trust. It proposes a solution, but actions are supposed to be taken before June 28, 2005 and all future trusts in some states will have to have spousal consents.

BOTTOM LINE: Every CRT that is executed in the future should have a spousal consent attached to it. Even if your particular state does not have a law that gives a spouse such rights, the donor might later move to a state where a spouse could have such rights. Thus, in the future, a spousal waiver should be a standard part of every CRT form.

Trusts created before June 28, 2005 may also benefit from this safe harbor procedure. However, as long as the spousal right of election is not actually exercised, the Service will not challenge the qualification of a pre-June 28, 2005 trust solely by reason of the existence of that right, even if such a waiver is not obtained.
Planned Giving Design Center 3/30/05

Potential language for the waiver for a joint property trust, a separate property trust or a separate waiver would be as follows (Please note, does not represent legal or tax advice):

Trust language for Two Life Joint Property
Under applicable present or future law, as a result of marriage or another relationship, a surviving trust grantor may hold a "right of election" to receive a statutory share of the predeceased grantor's estate, as defined under Rev. Proc. 2005-24, 2005-16 IRB 1; therefore, both trust grantors hereby irrevocably waive and release all statutory share, elective share or any similar rights to assets of this charitable trust granted by present or future law, except the right to receive applicable charitable remainder trust income payments.
Name ______________________________ Date _______________
Name ______________________________ Date _______________

Trust Language For One Life
Under applicable present or future law, as a result of marriage or another relationship, a Successor Charitable Trust Income Recipient may hold a "right of election" to receive a statutory share of the predeceased grantor's estate, as defined under Rev. Proc. 2005-24, 2005-16 IRB 1; therefore, the Successor Charitable Trust Income Recipient hereby irrevocably waives and releases all statutory share, elective share or any similar rights to assets of this charitable trust granted by present or future law, except the right to receive applicable charitable remainder trust income payments.
Name ______________________________ Date _______________

Waiver of Statutory Share in Charitable Remainder Trust
On _____________, _______, the ___________________ Charitable Trust was created by Grantor(s) ________________________, with ____________ as initial trustee and ___________________ as initial income recipient(s). In accordance with Rev. Proc. 2005-24, 2005-16 IRB 1, the undersigned intends this irrevocable waiver to enable continued qualification of this Charitable Trust under IRC Sec. 664.

Under applicable present or future law, as a result of marriage or another relationship, the undersigned person may hold a "right of election" to receive a statutory share of a predeceased grantor's estate, as defined under Rev. Proc. 2005-24; therefore, the undersigned person hereby irrevocably waives and releases all statutory share, elective share or any similar rights to assets of this charitable trust granted by present or future law, except, if applicable, the right to receive charitable remainder trust income payments.
Name ______________________________ Date _______________
Taken from GiftLaw 3/30/05

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Estate Tax Bills Proliferate
New bills have been introduced to change the estate tax landscape. More may be introduced and what might actually be passed and become law could be similar or radically different. But, change is in the air. Four recent bills are:

Supporting Organizations Under Regulatory Scrutiny
Sen. Chuck Grassley, chairman of the Committee on Finance, and Sen. Max Baucus, ranking member, today said they plan to propose reforms to stop the use of "supporting organizations" for generous tax breaks rather than charitable purposes. The senators plan to include a crackdown on supporting organization abuse in their comprehensive charitable governance reform legislation to be introduced in the next few months.

Grassley and Baucus have learned of supporting organization abuse through their own investigation and media reports, such as the front-page story in today's New York Times.

"This is extremely troubling," Grassley said. "Individuals are using supporting organizations to play fast and loose with the tax rules intended to help charities and encourage giving. It's clear Congress and the administration will have to take steps to stop this abuse and ensure that charitable donations benefit the needy. I'm deeply disturbed that with a good number of supporting organizations, people are taking multi- million dollar tax deductions for what they claim are contributions to charity, yet too often the result is a thimbleful of benefit to charity.

"Both a Congressional Research Service report and the Finance Committee's review have made it clear that the problem isn't limited to Type III supporting organizations. The snake oil salesmen have also figured out how to manipulate Type I and II supporting organizations for the benefit of themselves and their clients. Meanwhile, the charities are lucky if they receive enough money to buy a blanket for the homeless. While the taxpayers get bilked by this abuse, sadly the needy ultimately suffer because they're denied the benefits intended by the tax law.

"The law intended to allow supporting organizations only for a narrow set of circumstances. Unfortunately, creative types are exploiting a loophole in the regulations by setting up supporting organizations to skirt the laws governing private foundations. You could drive a Mack truck through that loophole."
Planned Giving Design Center 4/26/05

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Charities Are Silent on Loss of Estate Tax
Charities stand to lose roughly $10 billion a year if the federal estate tax is repealed permanently, according to a study conducted by the Brookings Institution and the Urban Institute. That is roughly the equivalent of all the grants made by the country's 82 largest foundations in 2003. But while nonprofit groups have spent hundreds of thousands of dollars over the last year lobbying Congress against imposing tougher regulations on them, on this issue they have been silent.

The reason? No one wants to alienate the wealthy donors and board members who would benefit from a repeal.

So it goes in the world of philanthropy, which relies on the generosity of the wealthy but also on a tax code that creates incentives for giving. The estate tax includes unlimited deductions for charitable giving as a way of helping shield families from inheritance taxes. Eliminating the tax would also eliminate the need for the tax shelter.
NY Times 4/25/05

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