12/19/13 PAUL STEINBERG LETTER TO THE GAZETTE ON THE GOUVEIA PROPERTY

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From the 12/19 edition of THE GAZETTE WITH PERMISSION TO POST, PAUL STEINBERG'S LETTER

TO THE EDITOR:

The discussion about the million-dollar trust proposed as part of the Gouveia property deal is somewhat misleading.

Proponents of the Gouveia acquisition say that the donor is only getting the "income" of the trust, which implies that the corpus will not be touched. This is not necessarily true.

The common way in which such trusts are set up is that the donor takes assets (normally stocks) which have appreciated greatly in value. If the donor were to sell the assets, there would be a big capital gains tax bite. By putting the assets in the trust, the donor gets a tax deduction for the appreciated (current) value.

The donor then gets periodic distributions from the trust based on the appreciated (and non-taxed) value of the assets placed into the trust.

As a threshold matter, it should be remembered that the Trustees have broad discretion in which money is allocated to principal and which is allocated to "income."

Even if the trust does not have any real "income" in the layman's sense of the word, the donor will still be able to take a distribution, which must necessarily come out of the corpus.

Under most state law and under federal Treasury Department regulations, the Trustees may distribute 5 percent per annum from the corpus (more in certain circumstances). The amount that must ultimately be given to the remainder beneficiary (in this instance, the Village of Croton) can be as little as 10% of the value of the original amount.

All of this assumes that the principal does not suffer a reduction due to loss in the value of the underlying assets.

There was discussion at the Village meeting which assumed a 6 percent rate of income. In the current market, an investment strategy designed to produce such a stream of real income (as opposed to capital gains) would be very aggressive. Since return tends to be aligned with risk, such an aggressive strategy would risk loss (whether immediately recognized or not) to the trust corpus.

This is not to say that such a Trust is a bad idea for most charitable (remainder) beneficiaries, for whom any remaining corpus is pure gravy.

But in the case of the Gouveia property, the Mayor is claiming that the corpus will be sufficient to pay for the upkeep of the property at whatever date in the future the Village gets the income from the Gouveia Trust.

There is simply no basis for such an assertion, and if the income from the Trust is to be the source of funds for upkeep of the Gouveia "gift" at some point in the future, the Village trustees need to be more transparent as to the governance of the Trust.

The taxpayers of Croton deserve to know whether this "gift" is destined to become a money pit, and that is almost entirely dependent on whether the Trust will be sufficient to pay the operating costs on the property. It is bad enough that the taxpayers will have to ante up $50k per year to cover the property taxes which will not be paid.

There is no doubt that Ms. Gouveia has some very sophisticated legal and tax counsel. Whether the taxpayers of Croton are being as well-served is an open question.

--Paul Steinberg
ALSO YOU MAY HAVE AN INTEREST IN WALTER PLOTCH'S RECENT GAZETTE LETTER AS WELL; http://forum.ncnlocal.com/bb/viewtopic.php?t=7451