Traditionally, the investment objectives for charitable remainder trusts (CRTs) have included three core building blocks, ranked here in order of importance:

In a period where future expected investment returns are decreasing, and life expectancies are increasing, the IRS's minimum 5% payout rate presents a challenge for non-profits and their donors.

1

Lower Returns Are Expected

Given more fully valued equity markets and historically low bond yields, CRT portfolios may experience a negative expected real return.

2

Longer Lifespans Put Pressure on Growth Targets

Mortality table revisions mean a CRT established by a 75-year-old donor should incorporate at least two additional years of beneficiary payments and annual upward revisions of life expectancy.

3

Seeking Real Growth May Be Too Risky

Based on our 10-year capital market assumptions, a CRT would require a 100% equity allocation to surpass the historic 7.5% return target (with a standard deviation of 17.83%).

-22.5%

Based on our 10-year capital market assumptions, a CRT would require a 100% equity allocation to surpass the historic 7.5% return target (with a standard deviation of 17.83%).

10

Expected number of years it would take to recover from a 22% drawdown.

7.5

The minimum return a CRT with a 5% payout would need to earn to meet the three core objectives.

“First and foremost is to remember that the market does not offer a free lunch.”
Reaffirm the CRT investment objectives by adopting a real return objective
Accept that a 7.5% return target is too risky

The current environment means we need to reset our expectations. The level of risk required to achieve a +7.5% return is inappropriate for most nonprofits.

Reprioritize your investment objectives

Structure the portfolio primarily to satisfy the first two objectives—meeting the payment obligations and preserving the real purchasing power.

Diversify with fixed income investments

Bonds' low correlation with equities can be beneficial and regular income streams can be used to meet donor disbursements, limiting the need to sell securities.