Toward an Optimal Asset Allocation for Charitable Remainder Trusts

• DOI: http://doi.org/10.1002/nml.21227
• Date: 01 December 2016
• Author: David F. St. Peter,Luke F. Delorme
• Published date: 01 December 2016

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N M  L, vol. 27, no. 2, Winter 2016 © 2016 Wiley Periodicals, Inc.

Published online in Wiley Online Library (wileyonlinelibrary.com) DOI: 10.1002/nml.21227

Journal sponsored by the Jack, Joseph and Morton Mandel School of Applied Social Sciences, Case Western Reserve University.

Correspondence to: Luke Delorme, AIER, 250 Division St., P.O. Box 1000, Great Barrington, MA 01230. E-mail: luke

.delorme@aier.org.

Toward an Optimal Asset Allocation

for Charitable Remainder Trusts

Luke F. Delorme, 1 David F. St. Peter 2

1 AIER , 2 American Investment Services

Economic theory, relevant research, and a Monte Carlo model are used to develop invest-

ment guidelines for charitable remainder unitrusts ( CRUTs ). Investment for CRUTs

should involve a significant share of equities, with as much as 70 percent allocated to

equities for long-term CRUTs . Adjusting allocations as payout beneficiaries get older is

unnecessary given the nature of CRUTs , donors, and simulated outcomes. The authors

propose that a fixed asset allocation be used instead of one that changes over time and that

CRUTs with higher payouts should use a more aggressive asset allocation (more equities).

Keywords: charitable giving , financial , research, fundraising , trustee , asset allocation

CHARITABLE REMAINDER TRUSTS REPRESENT an opportunity for nonprofit organizations

to raise substantial assets in support of their long-term operations. Recent research has sug-

gested that charitable bequest giving may be underused (James 2015 ). This article looks at

charitable remainder unitrusts (CRUTs) and develops a prudent investment strategy for the

assets held by such trusts. Our experience is that charitable organizations believe they can

increase donations through CRUTs, but they do not have the capability of acting as trustee, in

part because they lack investment knowledge. This inability to manage the assets and therefore

to act as trustee—who is responsible for prudent investment allocation—is seen as an obstacle.

The approach outlined in our research will, we hope, help charitable organizations establish

and act as trustees for CRUTs.

Charitable remainder unitrusts are typically structured to provide annual payouts to non-

charitable recipients (beneficiaries such as the donor or a family member) and leave a

remainder for a charitable organization (called the remainderman), although the roles can be

reversed. These annual payouts are based on a fixed percentage, meaning the payout fluctu-

ates with the value of the trust. The trustee has the fiduciary duty of managing the assets for

the benefit of both the payout beneficiaries and the charitable organization. A visual overview

of the typical CRUT structure is provided as Figure 1 .

The nature of charitable trusts is different than the nature of individual investments because

the trustee must balance the potentially competing interests of the payout beneficiary and

the charity. Despite the popularity of CRUTs, there has been limited research on how they

should be invested to balance investment growth, amount and stability of annual income,

and the preservation of capital. In this article, we develop an asset allocation framework for