Nongrantor CLTs offer planning opportunities.

EXECUTIVE SUMMARY

* To generate an estate or gift tax charitable deduction, a charitable lead must be in the form of a guaranteed annuity or a unitrust.

* The longer the charitable lead, the larger the charitable deduction and the lower the transfer tax.

* The tax-avoidance aspects of CLATs are primarily a function of the interplay between the Sec. 7520 rate and the return that can be obtained on trust assets.

A charitable lead trust (CLT) is generally a grantor trust that allows the grantor a one-time, sizable income tax charitable deduction. However, use of a nongrantor CLT allows the trust to take charitable deductions over the trust term. Not only does the grantor not report the trust income, he takes a transfer tax charitable deduction for the transfer into the trust. This article and its extensive examples explain how nongrantor CLTs, particularly charitable lead annuity trusts, can be used to meet both charitable and wealth preservation goals.

Charitable lead trusts(1) (CLTs) are used by tax advisers to save clients transfer taxes and/or to reduce the cost of charitable contributions. The deduction generated by the charitable lead is used to shield the taxable remainder from some (or all) of the taxes otherwise imposed on a direct transfer. CLTs can also be used to bypass the limits on income tax charitable deductions. As illustrated below, these trusts generally make economic sense when an individual has significant charitable and wealth preservation motives; however, in the proper circumstances, they can also increase the wealth passed to family members (or others) above the amounts that would be possible without a charitable contribution.

Although CLTs have a long history in tax planning, there has not been much activity in recent years. Renewed interest in these vehicles should arise as individuals generate more and more wealth in this robust economy.

The tax adviser's role is to evaluate the usefulness of CLTs in given situations and perhaps, "sell" the concept to appropriate clients. Once it has been determined that a CLT is appropriate for a client, CPAs are particularly well prepared to help determine the appropriate characteristics to build into the trust. Because a client's attorney will actually draft the trust, drafting issues are discussed only generally in this article.

Definitions

CLTs can be structured in various ways. A "nongrantor trust" is any trust not subject to Secs. 671-679 and is a separate taxable entity. "Qualified" indicates a trust that generates a transfer tax charitable deduction for the contribution of property to it. To be qualified, a charitable lead interest must be in the form of (1) a guaranteed annuity (a charitable lead annuity trust (CLAT)) or (2) a unitrust (a charitable lead unitrust (CLUT)).(2) An inter vivos trust is created during life; a testamentary trust is established at death.

How Does a CLAT Work?

Qualified nongrantor CLATs offer a low-cost method of making charitable contributions. Benefits are achieved via the transfer tax charitable deduction generated by the charitable lead; the deduction shields some (or all) of the transfer into the trust from gift or estate tax. The trust's income is partly or wholly shielded from income tax by the trust's essentially unlimited income tax deduction for the amounts it transfers to charity each year. Finally, the transfer to the noncharitable remainder beneficiaries (NRBs) at trust termination is not subject to income or transfer taxes; thus, for the price of a charitable contribution, property is transferred by the grantor currently to be received by his NRBs at a specified future date at a lower effective transfer tax rate. At best, the transfer tax is eliminated.

A qualified nongrantor CLAT can also be used to avoid the individual contribution limits; both the income and the deduction are removed from the donor's income tax return and the trust's deductions are limited to income by Sec. 642(c)(1). This can be a significant benefit to those who exceed the Sec. 170(b)(l) individual charitable deduction limits.

Valuation Factors

The amount transferred to a CLAT ultimately benefits both a charity and the NRBs. The transfer of property into the trust is subject to transfer tax, but the value of the charitable lead annuity is deductible in determining the amount of the transfer subject to transfer tax. For gift tax purposes (i.e., inter vivos trusts), Temp. Regs. Sec. 25.2512-5T(d)(3) provides that the fair market value (FMV) of a charitable lead annuity created after April 30, 1999 is determined under Sec. 7520. For estate tax purposes (i.e., testamentary trusts), Temp. Regs. Sec. 20.2031-7T(4) provides that the FMV of a charitable lead annuity created after April 30, 1999 is determined under Sec. 7520. Sec. 7520(a) provides that an annuity is valued using 120% of the Federal midterm rate (rounded to the nearest 2/10 of 1%) under Sec. 1274(d) for the month in which the valuation date falls (or for either of the two preceding months). For example, the annuity factor is 7.50161 for a 10-year annuity interest, paid at the end of each year, when the Sec. 7520 rate is 5.6%.(5)

The following four examples illustrate the results using a 10-year CLAT and a 5.6% Sec. 7520 rate. The examples assume that the FMV of the property transferred and the transfer tax thereon total $1 million. For each example, the results achieved by using a CLAT are compared to the results that would be achieved by having the transferor (1) hold the property for 10 years, then pass it at death to NRBs net of tax; and (2) give the property (net: of tax) to individual donees who invest it for 10 years. It is assumed that the property will be invested the same way by the transferor, the trust and the taxable transferee.

Further, all individuals and trusts in the examples are U.S. citizens or residents subject to a 40% ordinary income tax rate and a 20% long-term capital gains (LTCG) rate; all taxable transfers are subject to a 55% gift or estate tax rate. Trust formation and administrative expenses have been ignored; donors are assumed to have both charitable and wealth preservation motives. Examples 1 and 2 assume the investment return is ordinary income; Examples 3 and 4 assume it is LTCG.

Example 1--conservative, ordinary income:

Individual X seeks to fund a CLAT when the available rate of return is 5.6%; all of the return will be ordinary' income. X funds the CLAT with $758,179; a charity will receive $42,458 (all of the trust income) annually. X has no income tax charitable deduction under Sec. 170(f)(2)(B), because the CLAT is a nongrantor trust. The trust will earn $42,458 (0.056 X $758,179) and take an annual charitable deduction under Sec. 642(c)(1) in that amount for 10 years; thus, the trust will have no taxable income. X will take a transfer tax charitable deduction of $318,503 ($42,458 [(1 - 0.57991)/0.0561) under Sec. 2522(e)(2)(B) (if gift tax, Sec. 2055(e)(2)(13) if estate tax), which leaves a taxable transfer of $439,676 ($758,179 - $318,503). X's transfer tax will thus be $241,822 (0.55 x $439,676).(6) At the end of 10 years, the charity will have received $424,580; the NRBs will receive $758,179. Essentially, the tax rate on the $758,179 transfer has been reduced from 55% to less than 32%.

If, instead, X kept the $1,000,000, invested it in bank certificates of deposit (CDs) or bonds paying a taxable 5.6% return, after 10 years, it would have grown to $1,391,634. If X then died, his heirs would receive $626,235 after a 55% estate tax. Thus, the heirs would receive approximately $132,000 more if X used a CLAT Thus, a CLAT makes economic sense under these facts if the property would otherwise be held until death.

Alternatively, if X made a $645,161 taxable gift, the gift tax would be $354,839 (55%). Assuming the donees invested the gift at 5.6%, it would grow to $897,828 after 10 years. The donees would receive about $140,000 more this way than with a CLAT, but a CLAT would allow for a charity to receive $424,580, more than three times the amount lost. Whether X would chose the CLAT or an outright gift would depend on the strength of his charitable motives. The box below summarizes the results.

                     Transfer method

                CLAT       Will       Gift
Who benefits:
Family          $758,179   $626,235   $897,828
Charily         $424,580         $0         $0
IRS (transfer
tax)            $241,822   $765,399   $354,839

Example 2--aggressive, ordinary income: The facts are the same as in Example 1, except that the rate of return is 15% and X wants the charity to receive $133,305 per year. To generate such a high rate of return, the trust assets will have to be high risk (e.g., junk bonds, a very profitable lease, a copyright, etc.) On trust formation, X will receive a $1,000,000 transfer tax charitable deduction ($133,305 [(1 - 0.57991)/0.056]), resulting in no tax on the transfer and no income tax charitable deduction. The trust's income of $150,000 in the first year will be partially offset by its $133,305 income tax charitable deduction, leaving $16,695 of taxable income and a 40% income tax of $6,678. As a result, the trust will grow by $10,017 in the first year; similar growth will occur in the remaining years. At the end of 10 years, the NRBs will receive $1,152,188; the charity will have received $1,333,050.

If, instead, X kept the $1,000,000, invested it at 15% and left it to his heirs at death 10 years later, it would have grown to $2,367,384; the heirs would receive $1,065,323. Alternatively, if X made a taxable gift of $645,161, the gift tax would be $354,839. Investing the gift at 15% would yield $1,527,331 after 10 years. As in Example 1, a CLAT yields a better result for the NRBs than if they receive the property after X's death. However, an outright gift benefits the donees by an additional $375,000 over the use of a CLAT, but the latter avoids transfer tax. The box below summarizes the results.

                          Transfer method

                CLAT         Will         Gift

Who benefits:
Family          $1,152,188   $1,065,323   $1,527,331
Charity         $1,333,050           $0           $0
IRS (transfer
 tax)                   $0   $1,302,061     $354,839

Example 3--conservative, LTCG: The facts are the same as in Example 1, except that the 5.6% return consists solely of LTCG. X funds a 10-year CLAT with $758,179; all of the trust's annual income ($42,458) goes to charity, $424,580 over 10 years. The NRBs will receive $758,179 when the trust terminates. The Service will collect $241,822 in transfer tax on trust fOrmation.

However, if X kept the $1,000,000, and earned (but did not recognize) 5.6% LTCG each year, it would yield $1,724,405 after 10 years. If X then died, his heirs would receive $775,982 after a $948,423 estate tax. Alternatively, if X made a $645,161 taxable gift, there would be a $354,839 gift tax. If the donees invested the gift (e.g., in stock) that yielded 5.6% (in realized, but not recognized, LTCG), it would grow to $1,112,519 after 10 years. If the stock were then sold, the capital gains tax would be $151,536, leaving the donees $960,983.(7) As a result, the heirs, receiving the transfer at X's death, receive about $18,000 more than with a CLAT, but a CLAT allows a charity to receive $424,580 and transfer tax would be partially avoided; if the donees received the gift outright 10 years before X's death, they would receive about $203,000 more than with a CLAT Whether X would choose a CLAT or an outright transfer depends on the strength of his charitable motives; the cost of making the charitable contribution would seem to be acceptable, especially for those clients who like to minimize taxes. The box below summarizes the results.

                     Transfer method

                CLAT       Will       Gift
Who benefits:
Family          $758,179   $775,982   $960,983
Charily         $424,580         $0         $0
IRS (transfer
 tax)           $241,822   $948,423   $354,839

Example 4--aggressive, LTCG: The facts are the same as in Example 2, except that all gain is LTCG. X transfers to a 10-year CLAT stock with a zero basis and a $1,000,000 FMV that pays no dividends. On trust formation, X receives a $1,000,000 transfer tax charitable deduction ($133,305 [(1 - 0.57991)/0.056]), but no income tax deduction, resulting in no taxable transfer. The trust will have to sell sufficient stock each year to generate funds to pay the charitable lead annuity; the income from these sales will be offset by the trust's annual charitable deduction, resulting in no taxable income.(8) The trust will then grow by the $16,695 of unrecognized income in the first year. Similar growth will occur in all 10 years. A charity receives $1,333,050 overall; at the end of the term, the NRBs receive $1,338,971. If the NRBs sell the stock, they will receive $1,071,177(9) after paying $267,794 (0.2 x $1,338,971) in capital gains tax.

If, instead, X kept the $1,000,000, invested it at 15% and left it to heirs at his death, they would receive $1,820,501 after estate tax of $2,225,057. The stock would have a stepped-up basis of $1,820,501. Alternatively, if X made a taxable gift of $645,161, there would be a $354,839 gift tax. If the donees invested it at 15% and recognized no income, it would grow to $2,610,036 after 10 years. This would yield $2,158,997 to the donees after being reduced by capital gains tax of $451,039 (0.2 x ($2,610,036 - $354,839(10))). Thus, the NRBs receive more than double with an outright gift than they would with a CLAT. Transfer tax is completely avoided by the use of a CLAT, but the charitable contribution comes at a significant cost to the NRBs. Whether X would use a CLAT in this situation depends on the strength of his charitable and tax-avoidance motives. The box below summarizes the results.

                                Transfer method

                        CLAT         Will         Gift

Who benefits:

Family               $1,071,177   $1,820,501   $2,158,997
Charity              $1,333,050           $0           $0
IRS (transfer tax)           $0   $2,225,057     $354,839

Analysis

The above examples clarify that the tax-avoidance aspects of CLATs are primarily a function of the interplay between the Sec. 7520 rate and the return that actually can be obtained on the trust assets. If the Sec. 7520 rate, the annual payment to charity and the return on assets are equal, the tax on the trust corpus passed to the NRBs at termination can be significantly reduced. (See Examples 1 and 3 above.) The longer the term of the charitable lead, the larger the charitable deduction and the lower the transfer tax will be.

If the return on the trust assets significantly exceeds the applicable Sec. 7520 rate (see Examples 2 and 4 above), it may be possible to increase the amount or term of the charitable lead such that the transfer tax is eliminated by the charitable deduction. Any recognized trust income over that required to fund the charitable annuity is subject to income tax at the trust's rates; the excess after tax is added to corpus to be passed to the NRBs at termination. However, for capital assets, recognition of any year's appreciation is generally voluntary. From a tax-avoidance perspective, a CLAT appears to be an attractive option for assets that generate unrecognized capital gains; however, the cost to the family of a CLAT compared to a direct transfer may be very high, and make a CLAT attractive only if the client has strong charitable and/or tax-avoidance motives.

If the return on trust assets is less than the Sec. 7520 rate, use of a CLAT is less attractive. If this is the case, the CLAT can pay an annuity equal to the income generated by the trust assets; the corpus will be preserved for the NRBs. However, the donor's transfer tax charitable deduction will be reduced; more of the corpus will be subject to tax, eroding the tax benefits. Alternatively, if the annuity were set above the income generated (to shield more of the transfer into the trust from tax), funds would have to be taken from corpus, reducing the NRBs' share. Effectively, the transfer tax will exceed 55%, an undesirable result.

Finally, the examples seem to indicate that the NRBs always benefit more from an outright gift than with a CLAT remainder interest, but the cost to these beneficiaries (in term of the amount of gift lost) varies widely with the facts. The NRBs' cost of using a CLAT versus receipt of the gift at the donor's death is quite variable. The cost can be quite high in some situations; in others, the NRBs benefit from a CLAT. Thus, the client's specific situation must be scrutinized before proceeding with a CLAT.

Inter Vivos or Testamentary CLAT?

The differences between inter vivos and testamentary trusts need to be examined; the most significant difference is the cost to the NRBs. There are three other potentially critical differences between an inter vivos and a testamentary CLAT. First, to the extent that the transfer into the trust is taxable, under Sec. 2035(b), the amount used to pay the gift tax on an inter vivos transfer will not be subject to transfer tax, if the donor survives the transfer by three years. With a testamentary trust, the amount used to pay the tax will be subject to estate tax. Obviously, the closer one comes to "zeroing out" the taxable transfer on trust formation, the less significant this difference will be. Second, with an inter vivos transfer, the donor will be able to enjoy the intangible benefits of making charitable contributions. Third, there is a Sec. 1014 step-up in basis of appreciated property transferred at death. When the same property is transferred as a gift, there is only a partial step-up, based on the gift tax paid. Thus, one would expect clients to prefer inter vivos trusts to testamentary trusts. However, when tax is due on trust formation, the benefit of avoiding transfer taxes on the amount used to pay the tax may be outweighed by the client's reluctance to pay the tax during life and/or to suffer the accompanying loss of assets. This is also a reason for not making outright inter vivos gifts. Ultimately, the client needs to choose between the different types of transfers.

LTCG vs. Ordinary Income

Examples 1-4 above illustrate that CLATs are more useful when the income generated by the prospective trust assets is currently recognized ordinary income, not unrecognized LTCG that can be deferred for extended periods. Generally, the assets will produce some currently recognized ordinary income and some deferred LTCG; the results will fall between the extremes illustrated above. This heightens the need for careful analysis of each individual situation.

CLAT or CLUT?

The distinction between CLATs and CLUTs is also significant. Under a CLAT, a determinable amount is paid at least annually(11) (i.e., a fixed amount must be paid to the charity, each year). Any income in excess of the payment is added to corpus and benefits the NRBs. (This addition is net of the income tax, if the income has been recognized.) However, if trust income falls short of the required payment, the difference must be made up from trust corpus, to the NRBs' detriment. When trust income is relatively predictable, this is not a significant issue. Conversely, if the income is unpredictable, the outcome is uncertain, depending on whether the income is higher or lower than expected. Because most taxpayers seek certainty in tax planning, there is a benefit to having predictable trust income. To maximize this benefit for NRBs, the trust should have high income relative to the required annuity payment and sufficient funds to cover it; otherwise, trust assets will have to be sold or the annuity will have to be paid in kind. Paying the annuity with a note is not advisable under Prop. Regs. Sec. 25.2702-3,(12) which provides that issuance of a note in satisfaction of an annuity amount does not constitute payment. Further, a trust provision that reduces the charitable annuity if income is insufficient will disqualify the trust as a CLAT, because it makes the payment amount uncertain at trust formation.

A CLUT slightly mitigates the income risk vis-a-vis a CLAT. To qualify, a CLUT must pay to a charity, at least annually, a fixed percentage of the FMV (determined annually) of the trust's assets.(13) As with a CLAT, there can be no adjustments after trust formation to the asset percentage annually paid.(14) But a CLUT provides some protection against income shortfalls. If the income falls short of the required payment, the difference can be made up from corpus; this reduces the value of the corpus and the future payments required. However, if trust income exceeds the required payments, the after-tax amounts are added to corpus, increasing the future payments required. If there is an income shortfall, the corpus is reduced, although not as much as with a CLAT. In either case, this decreases the amount that the NRBs would receive vis-a-vis a CLAT.

The buffering effect of a CLUT might make it preferable to a CLAT when the trust's income stream is unpredictable. However, a CLAT will generally be preferred when the primary concern is the NRBs' welfare, due to the ability to keep excess income for their benefit. In addition, any "excess" CLUT contributions to charity do not increase the transfer tax charitable contribution; essentially, they are wasted.

If the generation-skipping transfer (GST) tax(15) is an issue, a CLUT has a significant advantage--its inclusion ratio is fixed when the trust is formed. Under Sec. 2642(a), that ratio is determined based on the exemption amount allocated to the trust and on the value of the trust's assets at the time of the allocation. With a CLAT, the trust's inclusion ratio is not fixed until the end of the charitable lead, regardless of when the exemption amount is allocated to the trust.(16) Thus, there is more certainty as to the effect of the GST tax on a CLUT than on a CLAT. Also, assuming that the assets increase in value while in the trust, a CLUT allows the exemption to shield larger amounts from GST tax than does a CLAT.

Designing a CLAT

Once the decision has been made to use a CLAT to make a single transfer of assets to a charity and NRBs, four factors must be considered:

1. The Sec. 7520 rate.

2. The available rate of return on investments.

3. The CLAT's payout rate.

4. The charitable lead term.

For the most part, the Sec. 7520 rate is not really flexible. If the CLAT does not have to be formed immediately, the taxpayer may be able to wait until a month with a desirable rate occurs. Even with a short lead time, however, there is some flexibility as to the Sec. 7520 rate that will apply; Sec. 7520(a) allows use of the rate for the month of the transfer or either of the two preceding months in valuing the contribution. Because the rate is published shortly before the month in which it will apply, there is often a choice among four months' rates to be used in valuing the contribution. The lowest of the available rates will generally be chosen to maximize the charitable deduction.

The real rate of return tends to be quite variable and is a function of the investments available to the parties and the amount of investment risk they can tolerate. Bank CDs tend to have low returns and little risk, while closely held stock can have very high rates of return, but greater risk.

These first two factors listed above are somewhat controllable by the taxpayer, but essentially must be accepted as encountered. The payout and the trust term are completely controllable by the donor. There are no limits on the trust term or the payout rate, as long as they are positive. One can reduce the transfer tax on trust formation by manipulating the payout and the term together.(17) Frequently, the goal will be to reduce the taxable transfer to zero; to accomplish this, the payout rate will have to exceed the Sec. 7520 rate and a sufficiently long term will have to be designated. The lower the payout rate, the longer the term needs to be to reduce the taxable transfer to zero. Generally, the payout rate will be less than or equal to the rate of return on trust assets. If not, the NRBs' share will be partially or fully consumed over the life of the trust. If the trust rate of return exceeds the payout rate, the corpus will grow. Achieving a return equal to the Sec. 7520 rate is not very difficult. Usually, long-term CDs or shorter-term bonds will provide a sufficient yield. Significantly exceeding the Sec. 7520 rate will generally require investing the trust assets in vehicles with more risk (e.g., lower-rated bonds or publicly traded or closely held stocks).

Because the trust's life is generally matched with its payout rate to reduce the taxable transfer to zero, if possible, a higher payout rate should be coupled with a shorter term, given the Sec. 7520 rate and real rate of return. Setting a longer term or higher payout than required to "zero out" the tax on trust formation will result in a charitable deduction that exceeds the transfer into the trust (and thus, wastes the deduction).(18)

Return Disclosure

Transfers made to a qualified nongrantor CLT require the donor to file an estate or gift tax return, whichever is appropriate. The taxable part of a gift to a CLT does not qualify for the annual exclusion under Sec. 2503(b), because it is not a gift of a present interest. A gift tax return is required even if the deduction for the charitable lead reduces the taxable transfer to zero. Sec. 6019(3) (effective for gifts made after Aug. 5, 1997) implies that gifts of partial or split interests be reported on Form 709, U.S. Gift (and Generation-Skipping Transfer) Tax Return. The filing starts the statute of limitations running on the transfer if the disclosure is adequate under Sec. 2001(f).

Conclusion

The above discussion illustrates that qualified nongrantor CLTs are useful for donors who wish to divide their wealth between charitable and noncharitable beneficiaries, while limiting or eliminating transfer taxes (especially when the transfer is made near death). In certain circumstances, such a transfer can even increase the amount passing to the NRBs. Generally, CLTs increase the amount available to be divided between the charitable beneficiary and the NRBs at the expense of taxes. In some cases, the charitable gift results in a"profit" to the NRBs without significant detriment, except delayed distribution. Generally, CLATs will be preferred, because they give a larger benefit to the NRBs. However, if the trust's income is highly variable or the GST tax is a concern, a CLUT may be preferred. Obviously, the facts of each situation must be scrutinized before proposing a CLT.

For more information about this article, contact Dr. Weber at [phone] or [e-mail].

Editor's note: Dr. Weber is a member of the AICPA Tax Division's Tax Education Committee. The computations in this article are available from the author at [e-mail].

(1) A charitable lead trust is a trust that pays an income interest (the lead interest) to charity; the remainder goes to noncharitable beneficiaries at trust termination.

(2) Sec. 2522(c)(2)(B) allows a charitable deduction for inter vivos charitable lead interests; Sec. 2055(e)(2)(B) allows a deduction for charitable lead interests created at death. The difference between CLATs and CLUTs is discussed below, under the heading "CLAT or CLUT?".

(3) TD 8819 (4/29/99).

(4) Id.

(5) Temp. Regs. Secs. 20.2031-7T(d)(2)(iv)(A) and 25.2512-5T(d)(2)(iv)(A) each provide that the annuity factor can be derived from Regs. Sec. 20.2031-7(d)(6), Table B, which states that the remainder factor for a 10-year, 5.6% annuity interest is 0.57991. The annuity factor is then determined as follows: (1 - 0.57991)/0.056 = 7.50161; see also IRS Pub. 1457.

(6) The total, rounded, is $1,000,000 ($318,503 donation + $439.676 taxable gift + $241,822 tax).

(7) This computation assumes that the stock's basis was zero. It would be stepped-up to $354,839, the transfer tax paid; see Sec. 1015(d)(6). The resulting capital gains tax is $151,536 (0.2 X ($1,112,519 - $354,839)).

(8) If the stock had basis and the trust had no other income, some of the contribution deduction would be wasted.

(9) In Example 4, the remainder is reduced by capital gains tax for comparison purposes; obviously, this tax will not be paid unless the NRBs actually sell the stock.

(10) This computation assumes that the stock's basis was zero; it would be stepped-tip to $354,839, the transfer tax paid; see Sec. 1015(d)(6).

(11) See Regs. Secs. 20.2055-2(e)(2)(vi)(a) and 25.2522(c)-3(c)(2)(vi)(a).

(12) REG-108287-98 (6/22/99).

(13) See Regs. Secs. 20.2055-2(e)(2)(vii)(a) and 25.2522(c)-3(c)(2)(vii)(a).

(14) See INS Letter Ruling 7918102 (1/31/79).

(15) A discussion of the GST tax is beyond the scope of this article.

(16) Sec. 2642(e). The calculation of the GST exclusion ratio is rather complex and depends on the amount of the exemption allocated to the trust, when it is allocated and the applicable interest rate at trust formation.

(17) One way to manipulate the trust term to increase the charitable donation is to make the charitable lead payable for the life of an individual. Because Regs. Sec. 20.2031-7(d)(7), Table S, must be used for valuing any charitable annuity for the term of an individual's life, as long as that person is not "terminally ill" (defined by Kegs. Sec. 20.7520-3(b)(3)(i) as having at least a 50% probability of death within one year), an artificially high deduction can be achieved by measuring the lead by the life of a person who is in poor health with a relatively shorter life expectancy.

(18) See Regs. Sec. 1.170A-6(c) (3)(iii), which provides that if the conditions and circumstances surrounding a transfer of an income interest in property indicate that the charity will not receive the beneficial enjoyment of the interest, a charitable deduction will be allowed only for the minimum amount it is evident the charity will receive. While it can be argued that this position is incorrect and that a larger deduction should be allowed, a client might not want to incur litigation costs to establish the point.3