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Charitable remainder trust update: IRS keeping close watch on popular estate planning tool.


* Charitable remainder trusts charitable remainder trust (Charitable Remainder Irrevocable Unitrust) n. a form of trust in which the donor (trustor or settlor) places substantial funds or assets into an irrevocable trust (a trust in which the basic terms cannot be changed or the gift withdrawn)  (CRTs) are a favored way for donors to receive a charitable deduction of the present value of a future donation while retaining an annuity or unitrust income.

* CPA (Computer Press Association, Landing, NJ) An earlier membership organization founded in 1983 that promoted excellence in computer journalism. Its annual awards honored outstanding examples in print, broadcast and electronic media. The CPA disbanded in 2000.  tax advisers should be aware of recent guidance on CRTs concerning unrelated business taxable income Under the federal tax law, gross income reduced by adjustments and allowable deductions. It is the income against which tax rates are applied to compute an individual or entity's tax liability. The essence of taxable income is the accrual of some gain, profit, or benefit to a taxpayer.  (UBTI UBTI Unrelated Business Taxable Income ), pro rata [Latin, Proportionately.] A phrase that describes a division made according to a certain rate, percentage, or share.

In a Bankruptcy case, when the debtor is insolvent, creditors generally agree to accept a pro rata share of what is owed to them.
 division of CRTs and a type of transaction involving a CRT (1) (C RunTime) See runtime library.

(2) (Cathode Ray Tube) A vacuum tube used as a display screen in a computer monitor or TV. The viewing end of the tube is coated with phosphors, which emit light when struck by electrons.
 that the Service has designated a "transaction of interest."

* The IRS An abbreviation for the Internal Revenue Service, a federal agency charged with the responsibility of administering and enforcing internal revenue laws.  issued final regulations modifying the regime for UBTI received by CRTs. For tax years beginning after Dec. 31, 2006, a CRT that receives U BTI BTI Beverage Testing Institute
BTI Boyce Thompson Institute
BTI British American Tobacco (stock symbol)
BTI Boston Theological Institute
Bti Bacillus Thuringiensis Israelensis
BTI BioTechnology Institute
BTI Binding Tariff Information
 in a tax year is liable for a 100% excise tax Excise Tax

1. An indirect tax charged on the sale of a particular good.

2. A penalty tax applied to ineligible transactions in retirement accounts. This penalty is assessed by and paid to the IRS.

 on UBTI but retains its tax-exempt status.

* In a revenue ruling, the IRS addressed pro rata division of a CRT with two or more income recipients into new trusts. Generally, CRTs may be divided without termination or other penalties and the bases of assets carried over to the new trusts.

* In the "transaction of interest," a CRT with highly appreciated, low-basis assets sells them and replaces them with new assets. The income and charitable beneficiaries then sell their interests in the CRT to a third party. The income beneficiary Income beneficiary

One who receives income from a trust.
 recognizes little or no gain on the transaction by claiming an exception to the no-basis rule of 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] 1001 (e).


Although many investment assets have lost value in the past year, individuals coming to CPAs for estate planning Estate Planning

The overall planning of a person's wealth, including the preparation of a will and the planning of taxes after the individual's death.

Contrary to popular belief, estate planning involves much more than preparing a will, and it is not only for the
 advice often hold highly appreciated assets, and many want to make significant charitable gifts. For that mason, charitable remainder trusts remain a popular method of reducing assets subject to estate tax. They allow donors an income stream from assets that also support a charity. Thus, it's not surprising that the IRS continues to place a high priority on regulating these vehicles. CPA financial advisers should note three developments affecting charitable remainder trusts (CRTs) that occurred in the latter part of 2008.


First, the IRS and the Treasury Department issued final regulations modifying the Service's stance on the consequences of receipt of unrelated business taxable income (UBTI) by a CRT. Formerly, a CRT that received UBTI in any tax year was subject to tax for that year on its entire net income. However, for tax years beginning after Dec. 31, 2006, if a CRT has UBTI in any year, it retains its tax-exempt status but is liable for a 100% excise tax on its UBTI.

The Service also provided guidance on the tax consequences of a pro rata division of a CRT for the lives of two or more individuals.

In addition, the IRS labeled as a "transaction of interest" certain sales to a third party by grantors and remainder beneficiaries of their interests in a CRT that result in an artificially reduced gain claimed by the grantor An individual who conveys or transfers ownership of property.

In real property law, an individual who sells land is known as the grantor.

grantor n.
 from appreciated assets originally donated to the trust.


By setting up a CRT, a donor can avoid currently paying tax on the disposition of appreciated assets and invest the sale proceeds to generate a future income stream. The donor forms a CRT and contributes assets (such as appreciated stock) to it. The donor receives an income tax charitable deduction (as well as a gift or estate charitable deduction) when the CRT is created. The amount of the deduction is measured by the actuarial present value In actuarial science, an actuarial present value can be defined as the present value of a contingent event. In the field of life insurance, one can think of this as the market value of an insurance policy given some interest rate.  of the charity's right to receive the corpus on termination of the noncharitable (remainder) interest. The CRT sells the stock but does not pay tax on the gain, because the CRT is generally a tax-exempt entity under IRC [section] 664(c). The CRT then invests the proceeds of the stock sale and pays the donor an income stream for a fixed term of years (or over the course of a life or lives), based either on the value of the assets at the time the trust is created (annuity trust) or a fixed percentage of asset value each year going forward (unitrust). Any gain is taxable to the income beneficiary only when it is distributed. On completion of the term, the CRT distributes the remaining assets to a charity, which can include a private foundation established by the donor. If the donor retains an interest in the trust for life, the assets remaining in the CRT at death are deductible That which may be taken away or subtracted. In taxation, an item that may be subtracted from gross income or adjusted gross income in determining taxable income (e.g., interest expenses, charitable contributions, certain taxes).  for estate tax purposes.

Another type of charitable trust The arrangement by which real or Personal Property given by one person is held by another to be used for the benefit of a class of persons or the general public.  is the 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.

total lung-thorax compliance.
), which pays an income stream to the charity on the front end, with a remainder interest payable to noncharitable beneficiaries. CLTs are generally used to minimize gift and estate tax.


A CRT must make a minimum annual distribution of at least 5% of the fair market value (FMV FMV - full-motion video ) of the trust assets for either the lifetime of an individual or individuals or a term not to exceed 20 years. No distributions are permitted to any other individual, but a qualifying charity may in certain circumstances also receive income. Another individual or individuals can receive an interest for a term of years or for life following the first interest. However, state law may require that federal estate or state death taxes due upon the first beneficiary's death be equitably apportioned ap·por·tion  
tr.v. ap·por·tioned, ap·por·tion·ing, ap·por·tions
To divide and assign according to a plan; allot: "The tendency persists to apportion blame as suits the circumstances" 
 among the interests in the estate. In such cases, in the absence of clear direction to the contrary in a decedent's will, the secondary beneficiary will lose the life estate unless the secondary beneficiary pays any estate or death taxes for which the trustee may be liable on the first beneficiary's death (Revenue Ruling 82-128, 1982-2 CB 71). After the term of years or on the death of the measuring individual, the remainder interest (the present value of which must be at least 10% of the initial FMV of assets on funding) must pass to a qualifying charity. The trust must operate according to according to
1. As stated or indicated by; on the authority of: according to historians.

2. In keeping with: according to instructions.

 these rules from its inception.


Under IRC [section] 664(c), a CRT is a tax-exempt entity. For taxable years Taxable year

The 12-month period an individual uses to report income for income tax purposes. For most individuals, their tax year is the calendar year.
 beginning before Jan. 1, 2007, section 664(c) provided that a CRT would not be tax-exempt for any year in which it had UBTI within the meaning of section 512. The Tax Relief and Health Care Act of 2006 (PL 109-432) ameliorated this result to provide that if a CRT had UBTI in any taxable year, the CRT would remain tax-exempt, but a 100% excise tax would be imposed on its UBTI. The amendment applies to taxable years beginning after Dec. 31, 2006.

The IRS on July 24, 2008, issued final regulations (TD 9403, amending Treas. Reg. [section] 1.664-1) to reflect this change. The final regulations also clarify that the excise tax imposed on a CRT with UBTI is treated as paid from corpus, and the trust income that is UBTI is income of the trust for purposes of determining the character of the annuity or unitrust payment made to the beneficiary under section 664(b). The effect is that UBTI is taxed twice--once when it is incurred by the CRT and a second time when it is paid to the annuity or unitrust recipient. The final regulations provide further examples illustrating the tax effects of UBTI on a CRT.

The amount of UBTI is determined pursuant to section 512, with various modifications set forth in section 512(b), including a $1,000 de minimis An abbreviated form of the Latin Maxim de minimis non curat lex, "the law cares not for small things." A legal doctrine by which a court refuses to consider trifling matters.  deduction (section 512(b)(12)).


Occasionally, two or more income recipients of a CRT will want to divide their interests into separate trusts, such as when a couple divorces. Questions that often arise include whether the division could constitute a transfer of remainder interest that would cause the trust or separate trusts to fail to qualify as CRTs. The IRS addressed this and other issues in Revenue Ruling 2008-41, 2008-30 IRB IRB

See: Industrial Revenue Bond
 170, released in July 2008. In it, the IRS set forth two scenarios providing for the pro rata division of a CRT and addressed five questions associated with the division. The revenue ruling essentially consolidated issues that have been the subject of-9 many previous private letter rulings.

In the first scenario, the CRT ("original CRT") provides for the payment of an annuity or unitrust amount ("payment") for the lives of two or more individuals. When one individual dies, the remaining individuals are entitled en·ti·tle  
tr.v. en·ti·tled, en·ti·tling, en·ti·tles
1. To give a name or title to.

2. To furnish with a right or claim to something:
 to the entire payment. Upon the death of the last survivor of the payment recipients, the original CRT is to distribute its remaining assets to its charitable remainder beneficiary. The state court having jurisdiction over the original CRT has approved a pro rata distribution of the original CRT's assets into separate CRTs ("new CRTs"), one for each payment recipient. For purposes of the character of distributions from the new CRTs to the payment recipients, each new CRT will have an equal share of the original CRT's income in each tier described in section 664(b).

The trust instruments of the new CRTs will generally have the same provisions of the original CRT with some changes, the most significant of which is that upon the death of a payment recipient, the new CRT of such recipient is to be divided equally among the remaining living recipients until the last recipient has died. At that time, the new CRT will terminate and distribute its assets to the charitable remainder beneficiary.

The second scenario is similar to the first scenario, except that the pro rata distribution is pursuant to a divorce and, upon the death of a payment recipient, the new CRT for such recipient is distributed to the remainder beneficiary (not the surviving payment recipient).

First, the IRS addressed whether the pro rata division causes the new CRTs to fail to qualify as CRTs under section 664(d). The IRS reasoned that the new CRTs generally operate in the same manner as the original CRT, with slight modifications to mirror the result in the original CRT. It noted that after the original CRT's pro rata division, the new CRTs continue to meet the definition of a CRT in section 664(d). Therefore, the new CRTs do not fail to qualify as CRTs under section 664(d).

Next, the IRS addressed the basis and holding period of the assets of the new CRTs. The IRS noted that the pro rata division of the CRT is not a sale or exchange. Therefore, under section 1015(b), the bases of the assets in the original CRY are "carried over" to the bases of the assets in the new CRTs, and under section 1223(2), the holding period of the assets in the original CRT "tack" to the holding period of the assets in the new CRTs.

Another common concern is whether the pro rata division of the original CRT terminates the CRT, subjecting it to the termination tax of section 507. The IRS noted that the new CRTs generally have the same governing provisions and beneficiaries of the original CRT, and the termination tax of section 507 does not apply.

The IRS also addressed whether the pro rata division of the original CRT results in self-dealing under section 4941(d) by the payment recipients. The IRS noted that because the payment beneficiaries receive a payment from the new CRTs equivalent to what they would have received under the original CRT, the pro rata division of the original CRT is not an act of self-dealing under section 494 l(d).

Finally, the IRS addressed whether the pro rata division of the original CRT is a taxable expenditure under section 4945(d) and subject to the excise tax of section 4945(a). The IRS ruled that because the costs of the pro rata division of the CRT will be borne by the payment recipients, there is not a taxable expenditure to the original CRT that would be subject to the tax of section 4945(a).


Certain transactions involving a CRT that the IRS considers as manipulating the uniform basis rules may be deemed to have a potential for abuse and avoidance of tax on gain from the sale of appreciated assets. In Notice 2008-99, 2008-47 IRB 1194, the IRS described such a transaction involving the creation of a CRT and the subsequent sale of the interests in the CRT to a third party Because of the potential for tax avoidance The process whereby an individual plans his or her finances so as to apply all exemptions and deductions provided by tax laws to reduce taxable income.

Through tax avoidance, an individual takes advantage of all legal opportunities to minimize his or her state or federal
, the IRS has labeled it and substantially similar transactions "transactions of interest" for purposes of Treas. Reg. [section] 1.60114(b)(6).

In the first part of the transaction, a taxpayer creates a CRT pursuant to section 664 by transferring highly appreciated, low-basis assets to the CRT and taking back an annuity or unitrust interest. The taxpayer gives the remainder interest to a charity. The taxpayer will usually receive an income tax charitable deduction under section 170 for the present value of the remainder interest transferred to charity, as with any CRT. Next, the CRT will sell the appreciated assets and invest the proceeds in a diversified portfolio. Because the CRT is a tax-exempt entity, it will not recognize gain on the sale of the appreciated assets. The taxpayer will recognize the gain as he or she receives annuity or unitrust payments.

In the second part of the transaction, the taxpayer and the charity sell their interests in the CRT to a third party for an amount that approximates the fair market value of the assets held by the CRT. Under section 1001(e), if a taxpayer disposes of an income interest (for example, an annuity or unitrust interest) in a trust, any adjusted basis the taxpayer may have in such interest is disregarded in determining the gain or loss from the disposition of the interest.

An exception applies when the disposition of the income interest is part of a transaction in which the entire interest in the property is transferred to a third party. In such case, Treas. Reg. [section] 1.10011(f)(3) provides that the uniform basis rules under Treas. Reg. [section][section] 1.1014-5 and 1.1015-1(b) apply Under these rules, the bases of the assets in the CRT are apportioned between the income and remainder interests. Thus, when the taxpayer sells his or her annuity or unitrust interest in the CRT, gain will be determined by the difference between the proceeds received from the sale and the basis the taxpayer derives from the assets in the CRT. The taxpayer claims this provision and calculates any gain on the basis of the new assets rather than the original ones.

In effect, the sale eliminates much of the gain from the sale of the highly appreciated, low-basis assets the taxpayer would have otherwise recognized upon receiving an annuity or unitrust payment from the CRT. CPAs who act as material advisers with respect to these and substantially similar transactions could be subject to penalties if they fail to maintain lists of persons they so advise and to provide such lists to the IRS upon request.

A RESERVOIR OF WEALTH AND PHILANTHROPY philanthropy, the spirit of active goodwill toward others as demonstrated in efforts to promote their welfare. The term is often used interchangeably with charity.  

While the number of CRTs was relatively static at 115,754 in 2007--down slightly from the year before--the value of assets within them was considerable at nearly $96 billion in 2007, an increase of nearly 8% over 2006 ("Split-Interest Trusts, Filing Year 2007,, IRS Statistics of Income Bulletin, These figures attest To solemnly declare verbally or in writing that a particular document or testimony about an event is a true and accurate representation of the facts; to bear witness to. To formally certify by a signature that the signer has been present at the execution of a particular writing so as  to the value of CRTs in providing clients with an income stream while assuring long-term resources for philanthropic phil·an·throp·ic   also phil·an·throp·i·cal
1. Of, relating to, or marked by philanthropy; humanitarian.

2. Organized to provide humanitarian or charitable assistance:
 concerns. At the individual level, CRTs remain an attractive vehicle for clients. Clients are likely to appreciate advisers' efforts to keep them informed about provisions that could affect their income interests as well as their charitable goals.


See American Institute of Certified Public Accountants (AICPA).

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CPE - Customer Premises Equipment

* Advanced Estate Planning: Practical Strategies for Your Clients, a CPE self-study course (#737120)

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n post facilitation stretch; therapeutic approach utilized during proprioceptive neuromuscular facilitation in which the patient begins the stretch midway between the fully relaxed and fully stretched position and uses maximum level of effort to
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Membership in the Personal Financial Planning Financial planning

Evaluating the investing and financing options available to a firm. Planning includes attempting to make optimal decisions, projecting the consequences of these decisions for the firm in the form of a financial plan, and then comparing future performance against
 (PFP) Section provides access to specialized spe·cial·ize  
v. spe·cial·ized, spe·cial·iz·ing, spe·cial·iz·es

1. To pursue a special activity, occupation, or field of study.

 resources in the area of personal financial planning, including complimentary access to Forefield Advisor. Visit the PFP Center at Members with a specialization A career option pursued by some attorneys that entails the acquisition of detailed knowledge of, and proficiency in, a particular area of law.

As the law in the United States becomes increasingly complex and covers a greater number of subjects, more and more attorneys are
 in personal financial planning may be interested in applying for the Personal Financial Specialist (PFS) credential. Information about the PFS credential is also available at


IRS Guidance

* Notice 2008-99, 2008-47 IRB 1194

* Revenue Ruling 2008-41, 2008-30 IRB 170

* Revenue Ruling 82-128, 1982-2 CB 71

* Treasury Decision 9403

by Justin P. Ransome, Esq., CPA, and Vinu Satchit, CPA

Justin P. Ransome ( is a partner in Private Wealth Services in Grant Thornton LLP's Nabbnal Tax Office in Washington. Vinu Satchit ( is a senior manager in Private Wealth Services, Grant Thornton LLP This article or section is written like an .
Please help [ rewrite this article] from a neutral point of view.
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, in Charlotte, N.C. A longer version of this article, "Significant Recent Developments in Estate Planning," appeared in the September 2009 issue of The Tax Adviser.

To comment on this article or to suggest an idea for another article, contact Paul Bonner, senior editor, at or 919-402-4434.
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Author:Ransome, Justin P.; Satchit, Vinu
Publication:Journal of Accountancy
Date:Oct 1, 2009
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