          
          
          
          The Net Income Limitation:
          
          
               The second major initial decision for the donor is
          how to deal with the net income limitation on the CRT
          payout.  The decision here will largely depend on your
          CRT investment policy, how immediate your need for
          income may be, or whether you wish to postpone income
          until a later time.  There are four possibilities:
               (1) Require annual payout whether or not there is
          net income sufficient to pay it, i.e. take some out of
          principal.  But keep in mind what happens then.  The
          effect of failing to meet a required payout by even a
          small percentage over many years has some dramatic
          results.  Assuming $1 million invested, an 8 percent
          payout and a 7 percent overall investment return, the
          principal would shrink to $739,700 in 30 years.  
               (2)  Limit annual payout to available net income,
          but include a "catch up" provision allowing shortfalls
          to be paid later out of future year excess income. 
          This is convenient for younger donors who don't want
          much income early in the life of the trust, later
          switching to high income growth stocks when they
          retire.  This "growth without income" strategy early on
          can be accomplished by investing in growth securities,
          zero coupon bonds and deferred annuities.  In effect,
          this is using an appreciated asset to fund a pension
          plan substitute, without all the reporting and
          restrictions imposed on pension plans.
               (3)  Limit annual payout to the lowest of either
          the established annual payout amount or, the available
          net income.  If the CRT is funded with non-liquid
          assets like closely held corporation stock or real
          estate with little current income, this option is the
          best.
               (4)  Impose no net income limitations, thereby
          leaving open the possibility of employing a more growth
          oriented investment approach to produce an increased
          total return.  This makes sense when the CRT is funded
          with liquid assets which can easily be invested and re-
          invested - and when there is full-time, careful
          management. 
               These sorts of multi-year dollar projections are
          easily done by computer and should be available before
          choosing the rate of return and any net income
          limitations.  Also note that when we use the phrase
          "annual payout" in all of these alternatives, that
          includes the possibility you may elect to have payments
          semi-annually or quarterly, both of which are common.
               The "bottom line" as they say, on these choices is
          that while a CRT is a very useful investment device, in
          order to be successful the donor has to take a hard-
          eyed look at future economic realities, including
          inflation and long-term rates of return, before
          choosing an approach that matches the donor's goals. 
          It also means consideration of a lower payout rate,
          which may easily be more productive in the long haul.
               On a related point, trust donors can establish a
          longer term CRT that benefits them during their lives,
          then afterwards benefits successor generations of
          children and grandchildren.  This has the effect of
          maximizing the cumulative impact of tax-free
          compounding of value.  Careful planning must go into
          such an arrangement in order to avoid adverse estate
          tax and generation-skipping transfer taxes, but it can
          be done - and the many years of compounding makes it
          all worthwhile.
          
          
          
          
