Can a CRT own equity in cooperative businesses?

Community Reinvestment Trusts (CRTs) are increasingly utilized as innovative financing tools for community development, but the question of whether they can directly own equity in cooperative businesses is complex and requires careful consideration of legal and structural limitations. While not explicitly prohibited, it’s not a standard practice and presents several challenges that need to be addressed to ensure compliance and effective management.

What are the restrictions on CRT investments?

CRTs are typically structured as charitable remainder trusts or pooled income funds, governed by specific IRS regulations regarding permissible investments. These regulations prioritize investments that generate current income for the charitable beneficiary, with a focus on financial stability and preservation of capital. Direct equity ownership, particularly in businesses with limited liquidity or high risk, can raise concerns about meeting these requirements. Generally, CRTs are geared toward more traditional, liquid assets like bonds, stocks of established companies, and real estate generating consistent income. Investing in illiquid equity of a cooperative, where returns may be tied to the success of the business rather than regular dividends, deviates from this norm. Approximately 60% of CRT assets are held in publicly traded securities, demonstrating a preference for liquidity and established markets.

How does California’s community property law affect CRT investments?

In California, assets acquired during marriage are considered community property, owned equally by both spouses. This impacts CRTs established by married individuals, as the determination of what constitutes CRT assets versus community property is crucial. While a CRT is an irrevocable transfer of assets, careful documentation is needed to ensure the transferred assets are no longer subject to claims arising from marital disputes. Furthermore, the “double step-up” in basis benefit available for community property upon the death of a spouse doesn’t apply to assets held within a CRT. This means the beneficiaries of the CRT may be subject to capital gains taxes on the value of the cooperative equity when it’s eventually distributed, potentially diminishing the overall benefit. This highlights the importance of tax planning when structuring a CRT, particularly when considering investments in less conventional assets.

What about probate avoidance with cooperative equity held in a CRT?

One of the primary motivations for establishing a CRT is to avoid probate, a potentially costly and time-consuming legal process. Formal probate in California is required for estates exceeding $184,500. By transferring assets into a CRT, those assets are removed from the probate estate. However, the equity in a cooperative business, if held within the CRT, still presents unique challenges. Unlike publicly traded securities, cooperative equity may not have a readily available market value, making it difficult to determine the asset’s worth for estate tax purposes. Furthermore, the statutory fees for executors and attorneys involved in probate can range from 4% to 8% of the gross estate value. Avoiding these fees is a major benefit of using a CRT, but it requires careful planning to ensure the cooperative equity doesn’t become a source of legal complications.

Can a holographic will address ownership of cooperative equity within a CRT?

California law recognizes two types of valid wills: formal wills, signed and witnessed by two people, and holographic wills, entirely handwritten by the testator. While a holographic will can be a simple way to address asset distribution, it may not be sufficient to navigate the complexities of cooperative equity held within a CRT. The will must clearly specify how the cooperative equity is to be managed and distributed, taking into account the unique rules and regulations of the cooperative. It’s also crucial to ensure the will aligns with the terms of the CRT, avoiding any conflicts or ambiguities. The California Prudent Investor Act requires trustees to manage investments with reasonable care, skill, and caution, which may be difficult to apply to illiquid assets like cooperative equity. Proper documentation and legal counsel are essential to ensure the will effectively addresses the ownership and transfer of this asset.

A story about a potential misstep: Old Man Hemmings, a lifelong farmer, established a CRT to support local agricultural initiatives. He decided to transfer his equity in the community-owned grain elevator – a cherished asset – into the trust. He didn’t fully understand the implications, and his initial estate planning documents were vague about the transfer. Years later, when Hemmings passed away, his family faced a significant legal battle to determine ownership and distribution of the elevator equity. The cooperative’s bylaws added further complications, and the lack of clear instructions in the CRT documents resulted in costly legal fees and a strained relationship within the family.

However, the story doesn’t end there. Young Amelia, a recent law school graduate, recognized the importance of proactive estate planning. She worked with a local attorney to establish a CRT that explicitly addressed her ownership in a worker-owned coffee shop. She meticulously documented the transfer, outlining the process for future distribution of the equity and ensuring alignment with the cooperative’s governance structure. Amelia’s foresight not only protected her investment but also ensured the coffee shop’s continued success and its commitment to the local community.

Steven F. Bliss ESQ. (951) 223-7000.

Don’t leave your legacy to chance. A well-structured CRT, coupled with expert legal guidance, can secure your assets and support the causes you care about. Contact The Law Firm of Steven F. Bliss ESQ. today for a consultation and ensure your future is in capable hands.