Charitable lead trust can't deduct prepaid amounts.The older members of the Crown family created a nongrantor charitable lead trust Charitable Lead Trust A trust designed to reduce beneficiaries' taxable income by first donating a portion of the trust's income to charities and then, after a specified period of time, transferring the remainder of the trust to the beneficiaries. (under IRC (Internet Relay Chat) Computer conferencing on the Internet. There are hundreds of IRC channels on numerous subjects that are hosted on IRC servers around the world. After joining a channel, your messages are broadcast to everyone listening to that channel. section 2522(c)(2)(B)) in 1983. They funded the trust with $15 million, which was invested in securities the income from which would be used to make the trust's required yearly charitable donations. Charitable lead trusts are required to pay certain fixed amounts to charity for a number of years. The discounted present values of such trusts' income, as determined under IRS An abbreviation for the Internal Revenue Service, a federal agency charged with the responsibility of administering and enforcing internal revenue laws. tables, are allowed as charitable deductions. The remainder at the end of the term goes to the remainder beneficiaries--in this case, the younger generation of Crowns. Members of the generation in between were to serve as trustees. The trust instrument provided that the named charities receive $975,000 per year for 45 years. The discounted present value of that amount (determined to be $15 million using IRS tables) was taken as a gift-tax charitable deduction by the settlors of the trust at its creation in 1983. The trust instrument also provided that if "as a matter of law" the trustees could prepay amounts due to the charities without endangering the $15 million gift-tax charitable deduction, they could make prepayments Prepayments Payments made in excess of scheduled mortgage principal repayments. . For several years in a row, the trust paid more than $975,000 to the charities; it took income tax charitable deductions for the excess. For instance, in 1986, the trust paid and deducted $1.9 million. The IRS said the trust could deduct no more than the $975,000 per year. The Tax Court went along with the IRS. Result: For the IRS. The Tax Court's decision was affirmed. It was not certain, at the time of the prepayments, that prepayment Prepayment 1. The payment of a debt obligation prior to its due date. 2. The excess payment over a scheduled debt repayment amount. Notes: 1. Examples include deferred expenses such as rent and early loan repayments. 2. would not endanger en·dan·ger tr.v. en·dan·gered, en·dan·ger·ing, en·dan·gers 1. To expose to harm or danger; imperil. 2. To threaten with extinction. the $15 million charitable gift-tax deduction. The IRS could have perceived prepayments of the guaranteed charitable gifts as an abuse of the chatitable lead trust requirements. To achieve the certainty required under the trust instrument, the trustees would have had to obtain either a private letter ruling in their favor or an appellate court A court having jurisdiction to review decisions of a trial-level or other lower court. An unsuccessful party in a lawsuit must file an appeal with an appellate court in order to have the decision reviewed. ruling before making the prepayments. Therefore, under the terms of the trust instrument the prepayments are not allowable, and the amounts in excess of the annual $9 75,000 gifts are not deductible on the trust's income tax returns. * Rebecca K. Crown Income Charitable Fund (7th Cir., 1994). |
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