10 Deadly Sins: common errors to avoid in charitable trust administration.

• Author: Anderson, Timothy J.

With so many IRS requirements surrounding planned giving instruments, it's no surprise that mistakes are made in establishing and administrating charitable trusts.

Here are some common errors, based on importance.

1. Inappropriate asset allocation

   If a trust's assets are not allocated and invested judiciously, the donor, beneficiary or both may find themselves with financial problems.

   Often, when charities work as trustees, they manage the assets along with their endowment funds without regard to the donor's tax bracket, income needs or risk profile.

   But when fiduciaries do not meet their responsibilities--percentage payouts are too high or investment decisions are made without considering the donor's objectives--the donor and beneficiary may lose a lot of money.

2. Inappropriate payout percentage

   Attention must be given to the distribution percentage, as this cannot be changed. Some points to consider when establishing the percentage include the donor's age and objectives, as well as the investment/economic landscape.

   For example, it's not appropriate in today's weak investment environment to set a high payout percentage (more than 8 percent) for young donors (those in their early 60s or younger).

3. No written investment policy

   Without a written investment policy, trustees do not have a target to aim for. Fiduciaries are legally held to a "prudent investor" standard, and formal asset allocation guidelines and benchmarks are essential to meet a well-reasoned investment policy.

4. Inaccurate distributions

   Many donors who have not been educated on their fiduciary responsibilities seem to take a cavalier attitude toward required income distributions. Not making distributions as set forth in the trust may trigger the IRS to disqualify the trust. Also, the value of the trust at year end may be inaccurate if certain distributions have not been made.

5. Inaccurate calculation of the trust amount

   Inaccurate calculations of the amount to be distributed to the beneficiary usually involve not deducting year-end distributions from the trust amount since many times these deductions are made in January or February of the next year. This results in an overpayment to the income beneficiary in the subsequent year because the amount is recorded in the wrong year.

6. Errors preparing IRS forms

   One of the most common errors in completing IRS Form 5227 is using the incorrect fair market value in computing the "unitrust amount." This amount should be the prior year's...