Chapter 16: charitable remainder unitrusts.
A charitable remainder unitrust (CRUT) is an irrevocable, split-interest trust in which the donor reserves a unitrust interest for himself or at least one other noncharitable beneficiary, and through which the remainder interest in the property is donated to a qualified charity. The noncharitable unitrust interest can be measured by (1) the beneficiary's lifetime (or beneficiaries' lifetimes), (2) a term of years not to exceed 20, or (3) some combination thereof.
A CRUT resembles a charitable remainder annuity trust (CRAT--see Chapter 15), but provides a great deal more flexibility. The primary difference between a CRUT and a CRAT is that the noncharitable interest in a CRAT is a fixed annual annuity (i.e., a fixed dollar amount), whereas the noncharitable interest in a CRUT is a variable annuity (i.e., measured as a fixed percentage of the trust value each year). For a detailed explanation of the differences between CRUTs and CRATS, see "Questions and Answers," below.
WHEN IS THE USE OF SUCH A DEVICE INDICATED?
1. When the client has appreciated or non-income producing property from which he wishes to increase his return.
2. When the donor wants to make a testamentary gift of qualified retirement plan or IRA assets without giving up the lifetime payout from them.
Testamentary gifts of retirement plan dollars are a popular tool for charitable giving because such gifts allow donors to avoid the negative tax results imposed on such gifts after death. It is not uncommon for a donor to name a testamentary charitable remainder trust as the beneficiary of a retirement plan. A detailed explanation of charitable gifts of retirement assets is contained in Chapter 22.
1. A charitable remainder trust (CRT) allows the donor to make a currently deductible gift without giving up future income on the asset. Furthermore, the income stream from the CRT can be greater than the income the asset was providing prior to establishing the CRT.
2. A CRUT can offer the donor maximum flexibility with respect to the trust payout.
1. A gift to a CRT is irrevocable. If the donor expects to employ wealth replacement (see "Joint Life CRUT with Life Replacement Trust," below), it is important that his insurability be ascertained prior to the transfer.
2. The use of a CRT involves setup and administrative expenses that may not be justified for smaller gifts.
WHAT ARE THE REQUIREMENTS?
The requirements for a CRUT resemble the requirements imposed on a CRAT. (1) In order to qualify for income, estate, and gift tax charitable deductions, the CRUT's structure must meet certain guidelines set forth in the Code, applicable Treasury regulations, and IRS interpretations of the Code. (2) The requirements include:
1. A fixed percentage of the net fair market value of the trust principal, as revalued annually, must be payable to one or more noncharitable beneficiaries each year. At least one of the noncharitable beneficiaries must be an individual other than a charitable organization. (3) This interest is sometimes referred to as the "unitrust" interest. The donor may retain this unitrust interest for himself. (4)
2. The fixed percentage payable annually must not be less than 5% nor more than 50% of the trust value. (5) The actual frequency of the payments may vary from once a year to semi-annual, quarterly, or monthly. (6) There is a slight adjustment to the size of the income tax deduction depending upon which payment schedule is selected, and whether the payment is made at the beginning or the end of the time period. (7)
3. The unitrust interest, which is payable to one or more noncharitable beneficiaries, must be made either for a term of years (not to exceed 20) or, in the case of individual beneficiaries, for the life or lives of those noncharitable individuals. (8) Unitrust beneficiaries must be alive at the creation of the trust if they are to receive an interest for life. Thus, if a donor wishes to provide for a class of beneficiaries that might be expanded by future births (such as grandchildren), the unitrust interest must be limited to a term of years (not to exceed 20). (9)
4. The present value of the charitable remainder interest, as determined at the time that the CRUT is first created, must be equal to at least 10% of the initial trust value. (10) A donor can make multiple contributions to a CRUT since it is valued annually (this differs from a CRAT, to which only one contribution can be made). The 10% minimum remainder rule applies to the initial contribution and to any additional contributions that are made to the unitrust. (11) There is no requirement that a certain amount actually pass to the qualified charity at the termination of the trust. Depending upon actual trust performance and duration, the charitable remainder interest may be more or less than the value of the charitable remainder interest determined at the time of the CRUT's inception.
5. No amount other than the specified unitrust interest can be paid to or for the benefit of any person other than a qualified charitable organization. This requires that the entire remainder interest must go to a qualified charitable organization (see Chapter 2). (12)
Net Income Exception CRUT (NICRUT)
The preceding requirements apply to a "standard" CRUT--sometimes known as a "SCRUT." With a standard CRUT, the annual unitrust payment is paid regardless of trust income--even if the CRUT does not have sufficient income to make the payment. In other words, the trustee could be forced to sell or otherwise invade the trust principal. However, some assets do not have an established market and, thus, may be difficult to sell promptly to generate the required income. But there are two other types of CRUTs, each of which provides an alternative to the required unitrust payment in the event the CRUT does not have sufficient income to make such payments. These are collectively known as "income exception" CRUTs, meaning that both methods provide that the unitrust beneficiary will receive the lesser of the fixed percentage of the trust's value or the net income earned by the trust.
The first alternative form of CRUT is the "net income CRUT" or "NICRUT." A NICRUT provides that the unitrust beneficiary will receive each year the lesser of:
* the unitrust amount specified in the trust instrument (i.e., a fixed percentage of the value of the trust assets), or
* the net income earned by the trust during the year.
Example: Assume that a CRUT is established with assets worth $10,000,000, and that it provides an annual payout equal to the lesser of (1) 5% of the trust's value (as redetermined annually), or (2) the trust's actual earned income for that year. The trust earns $300,000 in a year in which the trust has a value of $10,000,000. A standard CRUT would require that the unitrust beneficiary receive $500,000--even though that amount exceeds the trust income. However, if the trust instrument is a NICRUT, it would require the unitrust beneficiary to receive only $300,000. If the amount of any year's payout to the unitrust beneficiary is less than the stated percentage payout amount, any excess is forfeited for that year and the process repeats for each successive year.
Net Income with Make-up Provision CRUT (NIMCRUT)
The second alternative form of CRUT is the "net income with make-up CRUT," or "NIMCRUT." A NIMCRUT resembles a NICRUT in that the unitrust beneficiary will receive the lesser of the fixed percentage of the trust's value or the net income earned by the trust However, a NIMCRUT differs from a NICRUT in that a "make-up" account accrues in those years when net income is less than the fixed percentage of the trust's value. A make-up account is simply an accounting record of the cumulative net shortfall in the unitrust amounts actually paid out to the unitrust beneficiary each year. In a subsequent year, if trust net income is greater than the fixed unitrust percentage, net income will be paid out up to the total of the current year's unitrust percentage, plus any balance in the make-up account.
Example: Assume that the NIMCRUT is funded with $10,000,000 on January 1, 2007. The unitrust percentage is 5% of the trust's value (measured at the beginning of the year). During 2007, the trust earns income of $300,000. Because $300,000 of income is less than 5% of the trust value (5% x $10,000,000 = $500,000), the unitrust beneficiary receives only $300,000. The $200,000 difference between the fixed percentage amount and the actual income earned (and distributed) is recorded in the "make-up" account.
Further assume that the trust has a value of $11,000,000 on January 1, 2008. Based upon this revaluation, the unitrust percentage amount is $550,000 for 2008 (i.e., 5% x $11,000,000). If the trust earns $700,000 in 2008, the unitrust beneficiary will receive the entire $700,000. The distribution will represent $550,000 for the 2008 unitrust percentage and $150,000 from the make-up account (i.e., earned in 2007). At the end of 2008, the make-up account will have a balance of $50,000 (i.e., the $200,000 that was not distributed in 2007, minus the $150,000 in "excess" earnings distributed in 2008). The make-up account is not adjusted for the time value of money.
Caution: Although the use of a NIMCRUT provides numerous planning opportunities, especially for appreciated property, it is important that the donor fully understand that no unitrust payment will be made until and unless the NIMCRUT earns "income" (as defined in a trust accounting sense). (13) In one case, a state appeals court judge remanded a case to the trial court for a determination of fraud and negligent misrepresentation when the donor alleged that he did not realize that distributions from a NIMCRUT would not be made until after the contributed real estate has been sold and the NIMCRUT earned income. In this case, nonproductive real estate was contributed to the NIMCRUT and the trustee was unable to immediately find a buyer for the property, causing a delay in distributions to the unitrust beneficiary. (14)
From the discussion above, it is clear that by using a NIMCRUT when contributing highly appreciated property, the trustee need not make distributions-in-kind or undergo a forced sale of contributed property to make the annual unitrust payments to the trust's unitrust beneficiary. Instead, the trustee can sell the trust property at the most opportune time and "make up" payments to the unitrust beneficiary later when the trust receives income. In some instances, NIMCRUT investments are intentionally selected to allow the trustee to postpone the unitrust distributions until income is needed by the beneficiary--in effect making the NIMCRUT a tool for supplemental income at a later time, such as retirement. However, at some point, the unitrust beneficiary may prefer the more predictable distributions that can be obtained with a standard CRUT.
The advantages of a NIMCRUT (income deferral) and a standard CRUT (reliable distributions) are sometimes combined into another type of trust, known as a "FLIP Unitrust" or a "FLIP-CRUT." A FLIP Unitrust ordinarily begins as a NIMCRUT, and at some future time changes or "flips" to a standard CRUT. The "flip" is permitted to occur only upon the happening of a triggering event that is not, and must not, be within the control of the donor, unitrust beneficiary, trustee, or any other person. (15) Commonly, the trust will provide for the "flip" to occur upon the sale of unmarketable funding assets, such as real estate. Other triggering events could include the removal of restrictions on Rule 144 stock (i.e., restricted stock), a beneficiary's 65th birthday, or the death of a beneficiary's spouse. (16) While there is no specific authority, it seems that tying the "flip" to a beneficiary's retirement could violate the rule that the event not be within the control of the beneficiary.
A CRUT is allowed to "flip" only once. The "flip" must be from a NIMCRUT or NICRUT to a standard CRUT--a "reverse flip" from a standard CRUT to a NIMCRUT or NICRUT is not allowed. (17) Once the triggering event occurs, the change in payout method will occur on January 1 of the year following the year in which the triggering event occurred. (18)
HOW IS IT DONE?
Joint Life CRUT with Wealth Replacement Trust
First, the charitable advisor gathers information from the prospective donors pertaining to their financial situation, goals, and whether they have a desire to donate money to a particular charitable organization. The advisor determines that the clients want to meet the following goals: defer capital gains taxes on the appreciated assets; secure a lifetime annuity stream; create an endowment for the charity of their choice; and provide for their children. A CRUT provides a grantor with a current income tax deduction and an ongoing income stream. Additionally, the grantor can use a CRUT to "avoid" paying capital gains taxes on appreciated assets immediately. However, once assets are transferred to a CRUT, and out of the grantor's estate, those assets are not available to the grantor's heirs after the grantor's death. A "wealth replacement trust" funded by life insurance can complement a CRUT and restore assets to the grantor's heirs.
The charitable advisor, working with other professional advisors, prepares a plan that includes using a wealth replacement trust in conjunction with a CRUT. After the clients have reviewed the plan and agreed to it, the determination is made whether they qualify for the life insurance that will be used as the wealth replacement portion of the plan. When the donors' insurability is verified, the CRUT document is drafted by an attorney experienced in drafting CRUTS and life insurance trusts. After the CRT document is drafted, the donors can execute (i.e., sign) and fund the wealth replacement trust with life insurance; then, the donors transfer their highly appreciated stock to the CRUT. Once the life insurance is in force, the donors execute the CRUT document, and their attorney re-registers their stock in the name of the CRUT. The CRUT trustee then sells the stock and reinvests the proceeds in a diversified portfolio of securities. (19)
Example: Bob and Mary Smith are ages 64 and 62, respectively. They own $1,000,000 of appreciated stock with a very low basis ($100,000). Although this stock has appreciated greatly, it is not producing much income for Bob and Mary. The Smiths are charitably inclined and have made substantial cash gifts to charities in the past. They are interested in three things: (1) deferring capital gains taxes on the appreciated assets; (2) securing an income stream for life; and (3) providing for their heirs. A CRUT could be the solution for them.
Bob and Mary decide to donate the stock to a CRUT where the remainder beneficiary will be Bob's alma mater, Drake University. The Smiths will receive 7% of the trust assets (valued annually each year) as income for as long as either of them is alive. After they both die, Drake University will receive whatever money is left in the trust.
Bob and Mary will receive an immediate income tax deduction based on the remainder value as calculated under IRS guidelines. These guidelines take into account Bob's and Mary's ages, the unitrust percentage they will receive each year, the current Section 7520 rate, and their life expectancies. Based upon a Section 7520 rate of 6.8%, Bob and Mary would receive a total income tax deduction of $224,700 (see Figure 16.1). Assuming they are in a 40% tax bracket, this would result in total income tax savings of $89,880. Should their family income not be high enough for them to take the full income tax deduction in the year of donation, they may carry over the remainder of the deduction for up to five years, or until the deduction is completely used. (20)
Bob and Mary will also receive income from the CRUT. Every year, the trust assets will be valued at the beginning of the year, and 7% of that value will be paid at the end of the year. For instance, in year one Bob and Mary will receive $70,000 from the unitrust (see Figure 16.2). Assuming that the trust assets grow at 6% each year, Bob and Mary will receive a gross income of $1,500,253 over their joint life expectancy of 24 years. If the trust grows at more than 6% per year, the annual payout to Bob and Mary will increase as the value of the CRUT increases.
Bob and Mary decide to use some of this income to create an irrevocable life insurance trust (ILIT) that will buy a survivorship universal life insurance contract with long-term policy guarantees. At their ages and using standard underwriting, assume the premium that would guarantee coverage for their joint lives would be $15,442. (21) Over their joint life expectancy of 24 years, this would represent total premiums of $370,608. (22) Every year, Bob and Mary will give $15,442 cash to the trust, and the trust will pay the insurance premium. Upon the death of the surviving spouse, the proceeds of the ILIT will go to their heirs (see Figure 16.3).
[FIGURE 16.3 OMITTED]
In this way, Bob and Mary have satisfied the following goals: secured a current income tax deduction; secured a lifetime annuity stream; created an endowment for the charity of their choice; and provided for their children.
WHAT ARE THE TAX IMPLICATIONS?
Ordinarily, a taxpayer receives a charitable deduction only for a gift of a complete interest in property. Gifts of partial interests do not qualify for charitable deductions unless a specific provision in the Internal Revenue Code allows for such deductions. (23) One such statutory exception to the partial interest rule is the CRUT. (24)
All charitable remainder trusts, including CRUTs, have two distinct tax characteristics. First, the donor is entitled to a deduction for income, gift, and estate tax purposes. The donor's charitable deduction is equal to the present value of the remainder interest to be given to the qualified charity when the income stream terminates. Second, the CRUT itself is exempt from federal income taxes, provided that the CRUT continues to qualify as a charitable remainder trust, and does not engage in certain prohibited activities that give rise to a special type of earnings (i.e., "unrelated business taxable income" (UBTI)). The two tax characteristics of a CRUT are discussed in more detail below.
At the time that a donor contributes highly appreciated property to a charitable remainder trust--frequently a CRUT--he can claim a current income tax charitable deduction for the present value of the remainder interest, which will eventually pass to a qualified charity. Because the assets in the CRUT will ultimately pass to a qualified charity, the CRUT is exempt from federal income taxation. Since the CRUT is exempt from federal income taxation, the trustee can sell the appreciated property without incurring an immediate capital gain tax. Because there is no capital gain tax imposed on the charitable trust, the trustee can reinvest 100% of the sale proceeds in income-generating assets. However, it is important to note that income tax cannot be completely avoided when using a CRUT--in actuality, the tax is deferred. When the unitrust beneficiary of the CRUT receives the income stream from the trust, he must recognize income (i.e., ordinary income, capital gains, or other (tax-exempt) income). See "Taxation of CRUT Income and Payouts" below.
Value of the Charitable Deduction
Income tax charitable deduction. A CRUT may be created during the donor's lifetime (i.e., inter vivos) or at the donor's death (i.e., testamentary). The donor of an inter vivos CRUT receives an immediate income tax deduction equal to the present value of the remainder interest that will eventually pass to a qualified charitable remainder beneficiary. In general, the present value of the charitable remainder interest (i.e., the amount of the deduction) is determined by multiplying the fair market value of the property transferred to the CRUT by the appropriate unitrust remainder factor. (25) (See Appendix K for a detailed explanation of the calculation.) The value of the unitrust remainder interest can be determined from comprehensive tables provided by the IRS. (26) The factors considered in determining the value of the charitable remainder interest are as follows:
1. the fair market value of the property being donated to the CRUT;
2. the term of the trust; (27)
3. the form of trust payout to the unitrust beneficiaries (i.e., standard payout, net income, or net income with make-up);
4. the stated unitrust payout rate;
5. the frequency of the payments (annually, semiannually, quarterly, or monthly);
6. the timing of the payments; and
7. the IRS discount rate (i.e., the Section 7520 rate) in effect for the month of the gift, or either of the two months immediately preceding the gift. (28)
Although in practice the noncharitable distribution under a NICRUT or NIMCRUT may be smaller than under a standard CRUT, the calculation of the value of the charitable remainder interest (and, thus, the income tax deduction) is the same for all three types of CRUTs.
The remainder value is identical because the IRS tables assume that the full unitrust payment will be made at the earliest date under both the NICRUT and NIMCRUT.
The donor's income tax charitable deduction is subject to the same percentage limitations and carryforward rules that apply to outright charitable gifts made during life (see Chapter 3). (29) Unlike outright charitable gifts, CRT gifts do not require that the donor obtain a contemporaneous written acknowledgement of the contribution by the donee organization. (30)
Gift tax charitable deduction. If the retained unitrust interest is given to anyone other than the donor, the donor has made a gift that must be reported for federal gift tax purposes. (31) The full value of the donated property must be reported on a federal gift tax return (Form 709); however, the donor will be entitled to a gift tax charitable deduction for the value of the remainder interest passing to the qualified charitable organization. Even if no taxable gift is made in connection with the establishment of the CRUT, a federal gift tax return must still be filed for the year of the gift to the CRUT. (32)
Estate tax charitable deduction. If the donor creates an inter vivos CRUT and retains for himself a lifetime unitrust interest in the trust, the full fair market value of the CRUT will be includable in the donor's gross estate. However, an estate tax charitable deduction can be claimed for the amount of the remainder interest donated to charity. (33)
Taxation of CRUT Income and Payouts
Taxation of CRUT income. The CRUT itself is exempt from all federal income taxes unless it has unrelated business taxable income (UBTI). Care must be taken to avoid UBTI because any UBTI will cause all trust income to be subject to federal income taxation. (34)
Taxation of amounts received by noncharitable beneficiaries. At times, some promoters make it appear that ordinary income or capital gains tax can be completely avoided by contributing appreciated property to a CRUT. In reality, it is more appropriate to say that these taxes can be deferred (and, at times, reduced) by contributing appreciated property to a CRUT. This deferral is accomplished through what is called a "4-tier system." The 4-tier system characterizes distributions from a CRUT and ensures that any income that escapes taxation at the trust level (due to the tax-exempt status of the trust) will be taxed when received by the noncharitable unitrust beneficiary. (35)
Amounts distributed from a CRUT are taxed under the 4-tier system in the following order:
1. Ordinary income. Distributions to the noncharitable beneficiary are taxable as ordinary income to the extent that the CRUT earned ordinary income in that tax year. If distributions exceed current year ordinary income, the distributions will nevertheless be taxable as ordinary income if the CRUT earned ordinary income in a previous year that was not previously distributed.
2. Capital gains. Distributions will be treated as short-term capital gain to the extent that the CRUT had short-term capital gains in that year (or had such gains in a previous year that have not yet been distributed). If the distribution exceeds ordinary income and short-term capital gains (both current year and undistributed gains from previous years), the distribution will be characterized as long-term capital gain to the extent that there is current year long-term capital gain (and previously undistributed long-term capital gains).
3. Other income (e.g., tax-exempt income). If the distribution exceeds ordinary income (current and past year), short-term capital gains (current and past year), and long-term capital gains (current and past years), the distribution will represent other income to the extent that there is such other income for current and past years. Other income includes income that is tax-exempt for federal income tax purposes.
4. Return of principal. Finally, and only after all current year income and all previously undistributed prior year income is deemed to be distributed, a distribution from a CRUT will be characterized as a nontaxable return of principal. (36)
Clearly, the 4-tier system makes it impossible for a donor to avoid taxes indefinitely when appreciated property is contributed to a CRUT and later sold by the trustee. Even if the trustee were to invest the proceeds from the sale of the appreciated property entirely in tax-exempt municipal bonds, the distributions to the noncharitable unitrust beneficiary would represent income (either in the form of short-term or long-term capital gain) until the cumulative distributions equaled the total amount of capital gain incurred on the sale of appreciated property. However, while the tax on the gain cannot be avoided, the ability to defer the taxation can provide a significant benefit to the grantor.
Determination of Trust Income
For a NICRUT or a NIMCRUT, a distribution can only be made only from trust income. Despite the obvious importance of income determination, the Code provides surprisingly little guidance on what constitutes trust income. Specifically, the Code provides only that trust income is determined by terms of the governing trust instrument or under local (i.e., state) law. (37) In response to adoption of some version of the Uniform Principal and Income Act by most states, the Service has stated that it will respect allocations of amounts between income and principal pursuant to local law. (38) Conversely, definitions of income within a trust document that depart fundamentally from local law will not be respected by the Service. (39) Treasury regulations and IRS rulings provide the following limited guidance about the appropriate classification of capital gain income:
* Post-contribution capital gains. Ordinarily, a post-contribution capital gain is considered a return of trust principal, and not trust income. However, the IRS has ruled that a CRUT instrument can specifically classify post-contribution capital gain as income if it does not "represent a fundamental departure from state law." The characterization of post-contribution capital gains as trust income appears to be a commonly accepted practice among practitioners--especially when creating a NIMCRUT. (40)
* Pre-contribution capital gains. At one time, some practitioners believed that pre-contribution capital gains could be classified as trust income by specifying such treatment in the trust instrument. (41) The benefits of this are obvious when funding a NIMCRUT with highly-appreciated property. However, Treasury regulations make it clear that built in appreciation at the time of contribution is properly treated as principal--regardless of what the trust instrument provides. (42)
WHERE CAN I FIND OUT MORE ABOUT IT?
1. Toce, Joseph, Abbin, Byrle, Vorsatz, Mark, and Page, William, Tax Economics of Charitable Giving 2006-2007 (Warren Gorham & Lamont, 2006).
2. Leimberg, Stephan R., et al., The Tools & Techniques of Estate Planning, 14th edition (Cincinnati, OH: The National Underwriter Company, 2006).
3. Osteen, Carolyn M., et. al., The Harvard Manual on Tax Aspects of Charitable Giving, 8th edition (Boston, MA: 1999).
QUESTIONS AND ANSWERS
Question--What factors should be considered when deciding between a charitable remainder annuity trust (CRAT) and a CRUT?
Answer--A CRAT offers the primary benefits of simplicity and certainty. With a CRAT, the retained interest is a fixed dollar amount. Therefore, since the amount is fixed, there is no need for an annual revaluation as with a CRUT. For that reason (i.e., no annual revaluation requirement), a CRAT will be considerably easier, and less expensive to administer than a CRUT, especially when there are hard-to-value assets being contributed to the trust.
A second consideration is the need (or desire) for a fixed return. With a CRAT, the annual payout is fixed. The unitrust interest will not be reduced if the value of the trust decreases, unless the trust is completely liquidated by distributions.
A third consideration is the need for a hedge against inflation. While a CRAT offers the promise of a fixed annual return, this fixed annual payout can be a significant detriment in the event of inflation. For this reason, younger donors often prefer the flexible unitrust payment that is available with a CRUT, as opposed to the fixed payment guaranteed by a CRAT.
With a CRAT or a CRUT, in many instances the cash flow created from the trustee's investment of 100% of the sales proceeds on a tax-free basis will be significantly more than the cash flow that would have been earned by the donor from the contributed asset. Furthermore, the donor's source of income can be diversified by selling the contributed asset inside the CRAT or the CRUT and allowing the trustee to invest the proceeds in a diversified portfolio.
A fourth consideration is whether additional contributions to the trust are contemplated. A donor can make multiple contributions to a single CRUT, but the initial contribution is the only contribution that can be made to a CRAT.
Question--Many closely-held businesses are incorporated as S corporations. Can S corporation stock be contributed to a CRUT?
Answer--Yes, S corporation stock may be contributed to a CRUT. However, if this happens, the corporation's status as an S corporation will be automatically terminated. (43) In some situations, termination of S corporation status may be an acceptable consequence. However, any decision to transfer S corporation stock to a CRUT should be made only after careful consideration. Termination of the S corporation status will affect all shareholders, not just the shareholder contemplating the transfer.
In some instances (especially when the prospective donor owns all or most of the outstanding S corporation stock), it may be beneficial for the S corporation to create a CRUT. Any corporate contribution of property is treated as having been made pro rata by the shareholders of the S corporation. (44) Note, however, that contributions made by an S corporation will reduce a shareholder's basis in his or her corporate stock by the fair market value of the property contributed. (45) The result of this rule is a shifting of unrealized appreciation in the property to the S corporation stock--meaning larger gains if the stock is eventually sold. (46) This rule has no impact for cash and property that is not appreciated; in other words, the corporation's contribution of the property to the CRUT will have essentially the same impact as if the shareholder had created the trust.
Question--Why is it common for a NIMCRUT to invest in a deferred annuity contract?
Answer--In many instances, the grantor of a NIMCRUT does not want, or need, an immediate distribution from the CRUT. For instance, a donor with an irregular income pattern may want to time distributions from the NIMCRUT to occur in years when his other income is lower. In fact, this is a primary reason for selecting a NIMCRUT instead of a standard CRUT. (With a standard CRUT, payments must be made from trust principal if income is insufficient.) For a donor who wants to "time" distributions of income from the NIMCRUT to meet his or her needs, a deferred annuity can provide the desired investment vehicle. By specifying in the trust agreement that distributions from a deferred annuity contract should be treated as trust income, the trustee of a NIMCRUT can virtually "turn on and off" a NIMCRUT's income stream to suit the need of the unitrust beneficiary. This ability to control the recognition of income by the NIMCRUT provides yet another planning opportunity: the trustee can allow the assets in the NIMCRUT to accumulate on a tax-deferred basis for many years, and then control distributions in later years for supplemental retirement benefits. Few, if any, investment choices offer the trustee such flexibility.
Question--Has the IRS approved the use of a deferred annuity to control the timing of distributions from a NIMCRUT?
Answer--Although the IRS has addressed this issue on several instances, there is no final, formal guidance on this point. (47) The IRS first addressed this issue in the proposed charitable remainder trust regulations in 1997. At that time, the IRS stated that it was "studying" whether NIMCRUTs that were invested in assets that are used to control the timing of the receipt and taxation of the beneficiary's income could qualify as a valid charitable remainder trust. Furthermore, the IRS said that it would not issue letter rulings on such trusts. (48) However, in 1998 the IRS issued a Technical Advice Memorandum (TAM) (49) in which it said that a NIMCRUT's purchase of two deferred annuities was not an act of self-dealing and did not disqualify the trust. Furthermore, the IRS training manual for its agents states that the "vast majority" of NIMCRUTs will not engage in self-dealing if they invest in deferred annuities. (50) While a TAM constitutes guidance from the IRS' National Office to another IRS official in the field, it cannot be relied upon as authority by a taxpayer other than the taxpayer involved in the specific transaction at issue. (51)
Question--Can the grantor serve as trustee of a CRUT?
Answer--Subject to certain restrictions, the grantor of a CRUT can serve as trustee. However, neither the grantor nor any other person can be given a power that would cause the grantor to be treated as the owner of the trust under the grantor trust rules. (52) Otherwise, the CRUT will fail to satisfy the requirements of a valid charitable remainder trust. (53) In situations where the grantor is not the unitrust beneficiary, the grantor/trustee should not be given the sole power to (1) identify the eventual charitable remainder beneficiary, or (2) make discretionary distributions among a class of permissible unitrust beneficiaries. These powers can cause estate tax inclusion where it could otherwise be avoided. (54)
If the CRUT holds assets that do not have a readily determinable fair market value, the value of those assets should be determined by an independent trustee or by a qualified appraiser. (55)
Question--Can the donor contribute his home to a CRUT?
Answer--Yes, but the donor must vacate the property prior to making the contribution, to avoid self-dealing. The donor's use of the property after the transfer would constitute self-dealing even if the donor entered into an arm's-length lease with the CRUT. (56)
Question--If debt-encumbered appreciated real estate is to be contributed to a charitable remainder trust, does that create any special considerations?
Answer--Yes, several issues must be considered before contributing debt encumbered real estate to a charitable remainder trust, including a CRUT. In fact, it is generally recommended that the transfer of debt encumbered real estate be avoided. The following are some of the issues that should be considered before undertaking this risky transaction:
First, if the property is subject to a mortgage and the donor is relieved of the mortgage, the transfer should be treated as a bargain sale (see Chapter 10). If there is a bargain sale, the donor will be required to pay a capital gains tax. (57)
Second, a transfer of debt-encumbered property could disqualify the charitable remainder trust if the trustee pays the mortgage. The reason is that if the trustee makes the mortgage payment, it appears that the charitable remainder trust is a grantor trust for income tax purposes and, as a result, cannot qualify as a charitable remainder trust. (58)
Third, a transfer of debt-encumbered property may constitute self-dealing for the donor and the trustee. (59) This appears to be the case even if the debt is not assumed by the trust. (60)
Fourth, if the debt was placed on the property within five years of the date of transfer, the charitable remainder trust could be treated as receiving debt-financed income. If a charitable remainder trust realizes any debt-financed income, all trust income may be taxable. (61)
At one time, it was thought that these issues could be avoided by transferring an option to purchase debt encumbered property to the charitable remainder trust. However, the IRS has since ruled that a charitable remainder trust funded with such an option would not qualify as a valid charitable remainder trust. (62) One possible solution to this problem is to contribute the appreciated property to a partnership, and then contribute the partnership interest to the charitable remainder trust. The IRS has not specifically ruled on this use of a partnership.
Question--Can a charity be a unitrust beneficiary of a CRUT?
Answer--The answer is unclear. A CRUT must have one or more noncharitable unitrust beneficiaries. However, in addition to the noncharitable unitrust beneficiary, the CRUT can also have a charitable unitrust beneficiary. It is not clear whether the existence of a charitable unitrust beneficiary would reduce the value of the unitrust interest for gift tax purposes. There seems to be a conflict of authority on this point. In a private letter ruling, the IRS approved an estate tax deduction for the value of the current interest payable to the charity. While this ruling involved a charitable remainder annuity trust (CRAT) and not a CRUT, this distinction should not be of importance. But, in a revenue ruling, the IRS denied an estate tax deduction for the value of the current annuity interest payable to the charitable beneficiary. (63) This charitable annuity interest would not have been payable until the death of the noncharitable annuitants. This ruling also involved a CRAT, and not a CRUT.
Question--Does the charitable remainder beneficiary have to be determined at the time that the CRUT is created?
Answer--No. The selection of the ultimate qualified charitable beneficiary may be left to the trustee, the unitrust beneficiary, the donor, or a third person. (64) However, unless the CRUT instrument mandates that the ultimate charitable beneficiary qualify as a public charity, the grantor's income tax deduction will be treated as a remainder gift to a private foundation. Gifts to a private foundation receive less favorable income tax treatment than gifts to a public charity (see Chapter 3). Gifts of cash to a private foundation are subject to the 30% of adjusted gross income (AGI) limitation rather than the more favorable 50% limitation. Gifts of appreciated property (other than certain marketable securities) are subject to the 20% limitation, and the value of the contributed property is limited to the grantor's adjusted basis. (65) Thus, unless the ultimate charitable beneficiary of a CRUT is intended to be a private foundation, the CRUT instrument should be drafted to explicitly limit the beneficiary of the remainder interest in the CRUT to public charities. Moreover, if a private foundation is intended to be the ultimate remainder beneficiary of a CRUT, the CRUT should be funded with cash or qualified marketable securities, to maximize the donor's charitable income tax deduction.
Question--Since a CRUT must have one or more noncharitable beneficiaries, must the noncharitable unitrust beneficiary be an individual?
Answer--No, the noncharitable beneficiary is not required to be an individual. The noncharitable beneficiary of a CRUT can be an individual, trust, estate, partnership, association, company or corporation. However, the payment to a nonindividual beneficiary must be limited to a term of years not to exceed 20. The IRS has made limited exceptions to this rule for trusts created for the benefit of incompetent individuals. In a revenue ruling, the IRS approved a charitable remainder trust that provided distributions for the benefit of an incompetent individual for that person's life. (66) At one time it also appeared that a trust for the benefit of a competent person could be a permissible unitrust beneficiary. In a private letter ruling, the IRS determined that a separate trust for a competent beneficiary was a permissible unitrust beneficiary of a CRUT because the competent beneficiary had the absolute and unqualified right to withdraw all property from the trust and, thus would be treated as the owner of the trust property for federal income tax purposes (under IRC Section 678). However, in another private letter ruling, the IRS reversed its position and stated that only a trust for the benefit of an incompetent beneficiary qualifies as a permissible unitrust beneficiary. The IRS' position in the latest letter ruling has been criticized as unwarranted under both the explicit language and spirit of the Code. (67)
Question--What are the estate planning opportunities for using ESOPs and CRTs?
Answer--An individual may have a large portion of his wealth tied up in the stock of a single corporation and may seek to diversify such holdings. If those shares are highly appreciated, a sale will generally result in the recognition of significant capital gain for federal income tax purposes. However, if such a sale is instead made to the corporation's employee stock ownership plan (ESOP), diversification can be achieved with a concomitant deferral of any capital gain so long as the sale proceeds are reinvested in "qualified replacement property" (generally, securities traded on an established secondary market). (68) If a sale to an ESOP is made, capital gain is recognized only if the qualified replacement property is later sold, and the gain recognized is measured by the difference between the sale price of the qualified replacement property and the owner's original cost basis in his corporate stock. If the individual dies owning qualified replacement property, the individual's capital gain will never be recognized because such property receives a stepped-up basis as a result of the individual's death. (69) Thus, after the individual's death his heirs can sell the qualified replacement property and invest in other property with little or no gain realized on such later sale.
A sale of stock to an ESOP, and reinvestment of the proceeds in qualified replacement property, can be a useful income and estate tax planning strategy. However, once an individual elects to defer capital gain through the purchase of qualified replacement property, he is "locked in" to that portfolio. In other words, the individual cannot reinvest any portion of the qualified replacement property without accelerating the deferred gain. This is a significant drawback of this strategy, as illustrated by the example below:
Example: Assume that Robert Boyd (age 50) wishes to diversify his holdings in his corporation. He elects to sell his stock to the corporation's ESOP. Because Robert is relatively young, he elects to reinvest the sale proceeds in growth stock that constitutes qualified replacement property. Under IRC Section 1042, Robert will be able to defer the capital gain on the sale of his stock to the ESOP, but only for so long as he holds onto the original stock portfolio. When he reaches retirement age, it may be desirable for Robert to shift his emphasis from growth to current income for supplemental retirement planning needs. However, he will not be able to do so without accelerating the deferred capital gain.
However, it appears that this problem can be solved with a gift of the qualified replacement property to a charitable remainder trust. Generally, the transfer of highly appreciated, long-term capital gain property to a charitable remainder trust allows the donor to avoid immediate recognition of the gain in such property. This is so because the trust's later sale of the property is not attributed to the donor and, as a tax-exempt entity, the trust does not have to pay tax on the gain. Thus, by transferring the qualified replacement property to a charitable remainder trust, the donor is able to (1) achieve diversification on an ongoing basis through the trust's investment strategy, and (2) receive supplemental retirement income through a retained annuity or unitrust interest. Moreover, if the transfer of the replacement property is made to a NIMCRUT, the donor can achieve maximum planning flexibility.
Example: Assume that Robert transfers the replacement property to a NIMCRUT sometime after the sale to the ESOP. The individual does not need supplemental retirement income until retirement at age 65, which is approximately 15 years later. Therefore, the NIMCRUT can reinvest the qualified replacement properties in a growth portfolio until Robert reaches age 65. This will allow for significant growth in the principal of the trust without any diminution of the principal due to current unitrust payments. Later, when Robert retires, the trust's portfolio can be shifted from a growth emphasis to stress the production of current income instead. Because there will be a larger value from which to determine the individual's unitrust payments in retirement, and because additional distributions can be recouped from the NIMCRUT's make-up account, supplemental income from the NIMCRUT can be maximized without an adverse impact on the amount ultimately passing to the charitable remainderperson.
While the IRS has approved of this approach in several private letter rulings, it has done so with little legal analysis. (70) In those letter rulings, the IRS concluded that the transfer of qualified replacement property to a charitable remainder trust constituted a disposition within the meaning of IRC Section 1042(e). Code Section 1042(e) and its legislative history seem to provide for taxation upon disposition of qualified replacement property. (71) Nevertheless, the IRS has consistently determined that recognition of capital gain is avoided on the transfer of qualified replacement property to the trust. Apparently, the IRS views the transfer of qualified replacement property to a charitable remainder trust as a gift that is eligible for the gift exception of IRC Section 1042(e). However, in each of the rulings, the IRS noted that the trustee of the charitable remainder trust in question was under no obligation (express or implied) to sell the qualified replacement property, "nor [could] the trustee be legally bound to sell" such property. In summary, the planner would be well-advised to include similar language in any charitable remainder trust that will hold qualified replacement property.
Question--How are CRUTS used in closely-held businesses transfer planning?
Answer--The use of a CRUT to effectuate the transfer of a business from the current owner to the new ownership can benefit the business owner in several ways. By contributing stock to a CRUT, the business owner can take a current income tax charitable deduction for the present value of the charitable remainder interest. In addition, the business owner may also be able to benefit from an increased income stream in the future, as illustrated by the following example:
Example: Alexander owns 100% of the stock of Imperial Importers, Inc. At age 60, Alexander is anxious to implement a plan that will allow him to pass the business to his three sons, Nicholas, George, and Michael. Alexander will complete the transfer through the use of a CRUT. He will take the following steps to complete the transfer of the business:
First, Alexander will make gifts of Imperial Importers, Inc. stock to his three children. To accomplish this, Alexander will make annual exclusion gifts of stock to Nicholas, George, and Michael. (72)
Second, Alexander will transfer his remaining shares to a CRUT. Alexander will be permitted a current income tax deduction for the value of the remainder interest passing to charity. If Alexander structures the CRUT to pay the unitrust interest to him for his lifetime, there will be no current taxable gift.
Third, at some future time, Imperial Importers will offer to redeem all outstanding shares of the company's stock. Assuming that the CRUT tenders its shares for redemption, but the children do not, the three children will then own all of the remaining outstanding shares of stock. (73) If there are sufficient assets in the corporation, the shares can be redeemed for cash, and the unitrust distribution amount can be used as supplemental retirement income for Alexander. In some instances, the corporation will redeem the stock for a note. The corporation will then purchase key-person insurance policy on the life of Alexander. Upon the death of Alexander, the corporation can use the life insurance proceeds to satisfy the obligation under the note.
Caution: While this strategy appears appropriate under the language of the Code, it should be noted that the Treasury regulations contain an example that appears to explicitly prohibit redemption via a note transaction because it constitutes self-dealing. Other commentators have also suggested that this example is invalid in light of the broad language of the redemption exception in IRC Section 4941. (74) State redemption laws should also be considered. Some state laws prevent a corporation from redeeming stock if that redemption can cause the corporation to become insolvent; other states prevent redemption of stock for debt.
Fourth, once Imperial Importers has redeemed all of the stock from Alexander, Nicholas, George, and Michael will own 100% of the remaining outstanding shares, regardless of the number of shares each owns individually, and regardless of the percentage they collectively owned before the redemption.
The only significant downside to this transaction (assuming that the redemption is allowable under state law in the applicable jurisdiction) is that Nicholas, George, and Michael will have a cost basis in their corporate stock equal to the cost basis in the shares they received from Alexander. In effect, their cost basis will be nominal in most instances. But, in situations where the stock in the family business cannot be transferred to children without considerable estate and gift tax cost, the fact that the children will have little cost basis in their interests is not a high price to pay for transferring the business to the next generation.
As discussed earlier in this chapter, a grantor can establish several different types of CRUTs. In this instance, Nicholas is likely to choose a NIMCRUT because he realizes the closely-held stock owned by the CRUT is unlikely to generate sufficient income to cover the annual unitrust payment. Stated another way, if Alexander does not use a NIMCRUT (or NICRUT), the trustee may be forced to sell some of the CRUT assets (i.e., stock) or make in-kind (i.e., stock) distributions to Alexander in satisfaction of his annual unitrust interest.
(1.) See Chapter 15.
(2.) IRC Secs. 664(d)(2), 664(d)(3); Treas. Regs. [section][section]1.664-1, 1.664-3.
(3.) IRC Sec. 664(d)(2)(A); Treas. Reg. [section]1.664-3(a)(1).
(4.) According to a 1995 private letter ruling, an inter vivos charitable remainder trust cannot have more than one donor. Let. Rul. 9547004. However, commentators have noted that this ruling seems to lack authority in the Code and regulations. Moreover, it appears inconsistent with other rulings in which the IRS approved of charitable remainder trusts in which both the husband and the wife were donors of a single trust. Rev. Proc. 2005-52. The IRS has also ruled that trusts or limited liability companies (that are taxed as a partnership) are permissible CRUT donors. Let. Ruls. 9821029, 199952071.
(5.) IRC Sec. 664(d)(2)(A); Treas. Reg. [section]1.664-3(a)(2).
(6.) Treas. Reg. [section]1.664-3(a)(1)(i)
(7.) Treas. Regs. [section][section]1.664-3(c) and 1.665-4.
(8.) Treas. Reg. [section]1.664-2(a)(5)(i). IRC. Sec. 7701(a)(1) defines person as "an individual, trust, estate, association, company corporation or partnership." Therefore, while it is uncommon, the unitrust interest can be payable to a corporation or partnership if limited to a term of years not to exceed 20. Let. Rul. 9419021 (limited partnership as beneficiary), Let. Rul. 9205031 (corporation).
(9.) Rev. Rul. 2002-20, 2002-17 IRB 794 provides an exception to the 20-year term limitation for a CRUT beneficiary that meets the definition of "financially disabled."
(10.) See IRC Sec. 664(d)(2)(D); Treas. Reg. [section]1.664-3(b).
(11.) Treas. Reg. [section]1.664-3(b).
(12.) IRC Sec. 664(d)(2)(C). A qualified organization is an organization described in IRC Secs. 170(c), 2055(a), or 2522(a).
(13.) For the rules revising the definition of "income" under IRC Section 643(b) to take into account changes in the definition of trust accounting income under state laws, see Treas. Reg. [section]1.643(b)(3).
(14.) Martin v. Ohio State University Foundation, 139 Ohio App.3d 89, 742 N.E.2d 1198 (10th Dist. 2000). See Let. Rul. 200219012 rescinding CRUT where there was no trust income.
(15.) Treas. Reg. [section]1.664-3(a)(1)(i)(c)(1).
(16.) Treas. Reg. [section]1.664-3(a)(1)(i)(d).
(17.) Treas. Reg. [section]1.664-3(a)(1)(i)(c)(3).
(18.) Treas. Reg. [section]1.664-3(a)(1)(i)(c)(2).
(19.) The steps for implementing a CRUT-wealth replacement trust approach were adopted from The Charitable Remainder Trust Case Illustration Series: The Santiagos (Carmel, IN: Renaissance, Inc. 1997).
(20.) IRC Sec. 170(d)(1).
(21.) Manulife Survivorship UL 2000, Male NS Standard Age 64, Female NS Standard Age 62, Maximum Policy Protection Rider.
(22.) Should Bob and Mary live past the anticipated life expectancy, they would have to continue making premium payments of $15,442 until the younger insured reaches age 100.
(23.) IRC Sec. 170(f)(3)(A); see Chapter 5.
(24.) IRC Secs. 664(d)(2), 664(d)(3).
(25.) In some instances, the value of the property contributed to the CRUT may be limited to the donor's cost basis in that property. See IRC Sec. 170(e).
(26.) Comprehensive tables for valuing the remainder interest in a CRUT are contained in IRS Publication 1458, Actuarial Values (Beta Volume). See Appendix K.
(27.) The value of a noncharitable beneficiary's life payout (or a payout over the lives of multiple noncharitable unitrust beneficiaries) is ordinarily determined in accordance with the life expectancies provided by the IRS tables. However, an individual who is terminally ill may not use the IRS life expectancy tables. Treas. Regs. [section][section]1.7520-3(b)(3), 20.7520-3(b)(3), and 25.7520-3(b)(3).
(28.) The IRS discount rate is determined under IRC Section 7520 and is equal to 120% of the applicable federal mid-term rate.
(29.) See Chapter 3.
(30.) Treas. Reg. [section]1.170A-13(f)(13).
(31.) IRC Sec. 6019(3).
(32.) Treas. Reg. [section]25.6019-1(f).
(33.) IRC Secs. 2036(a)(1), 2039, 2055(e)(2)(A). However, the IRS has also ruled that if the income interest rate equivalent to the adjusted payout rate of the CRUT is less than the rate used to value the unitrust interest in the donor's life estate, then only a proportion of the trust property will be includable in the gross estate under IRC Section 2036. However, the full value would be includable under IRC Section 2039. Rev. Rul. 76-273, 1976-2 CB 268.
(34.) IRC Sec. 664(c); Leila G. Newhall Unitrust v. Comm., 104 TC 236 (1995), aff'd, 105 F.3d 482 (9th Cir. 1997).
(35.) IRC Sec. 664(b); Treas Reg. [section]1.664-1(d)(1).
(36.) IRC Sec. 664(b); Treas. Reg. [section]1.664-1(d)(1).
(37.) IRC Sec. 643(b).
(38.) Treas. Reg. [section]1.643(b)-1.
(39.) Treas. Reg. [section]1.643(b)-1; see also Let. Rul. 9018015.
(40.) Treasury Regulations state that with respect to NICRUTs and NIMCRUTs, post-contribution capital gain may be allocated to income pursuant to applicable local law and the terms of the governing instrument, only, but not pursuant to a discretionary power granted to the trustee. See Treas. Reg. [section]1.664-3(b)(3).
(41.) See Let. Rul. 9442017.
(42.) Treas. Reg. [section]1.664-3(a)(1)(i)(b)(4).
(43.) Rev. Rul. 92-48, 1992-1 CB 301.
(44.) See, generally, IRC Sec. 1366(a)(1)(A).
(45.) See, generally, IRC Sec. 1367(a)(2)(b).
(46.) The possible impact of the Treasury regulations promulgated under IRC Section 337(d) should be considered when substantially all the assets of the S corporation will be contributed to the CRUT.
(47.) See H.R. Rep. No. 91-413, 60 (TRA '69), reprinted in 1969-3 CB 239. In the legislative history to the charitable remainder trust rules, Congress expressed its concern that charitable remainder trusts not be used as a means to manipulate the size of trust distributions for the donor's benefit.
(48.) Rev. Proc. 97-23, 1997-1 CB 654; Rev. Proc. 99-3, 1999-1, I.R.B. 103.
(49.) TAM 9825001.
(50.) See Teitel, "Charitable Remainder Trusts - Final Regulations," Trusts and Estates, August, 1999, p. 44. See Internal Revenue Service Exempt Organizations Continuing Professional Education (CPE) Text for Fiscal Year 1999, Topic P: Thirty Years after the 1969 TRA-Recent Developments Under Chapter 42.
(51.) IRC Sec. 6110(k)(3).
(52.) IRC Secs. 671, 672, 673, 674, 675, 676, 677, 678.
(53.) Treas. Reg. [section]1.664-1(a)(4).
(54.) See IRC Sec. 2036(a)(2).
(55.) Treas. Reg. [section]1.664-1(a)(7). The definitions of "qualified appraisal" and "qualified appraiser" are contained at IRC Sec. 170 (f) (11) (E).
(56.) Treas. Reg. [section]53.4941(d)-(2)(b).
(57.) IRC Sec. 1011(b).
(58.) Let. Rul. 9015049, citing Treas. Regs. [section][section]1.664-1(a)(4), 1.677(a)1(d).
(59.) But see Treas. Reg. [section]53.4941(d)-1(a).
(60.) IRC Sec. 4941(d)(2)(A).
(61.) IRC Secs. 664(c), 514(c)(2)(B).
(62.) Let. Rul. 9501004.
(63.) Let. Rul. 8845012; Rev. Rul. 76-225, 1976-1 CB 281.
(64.) Treas. Reg. [section]1.664-3(a)(4). See also, e.g., Rev. Proc. 2005-52 through Rev. Proc. 2005-58; Rev. Rul. 76-371, 1976-2 CB 305, (trustee); Rev. Rul. 76-8, 1976-1 CB 179 (grantor); Rev. Rul. 76-7, 1976-1 CB 179 (beneficiaries); Let. Rul. 9504012 (grantors); Let. Rul. 9326049 (grantor); Let. Rul. 9014033 (beneficiaries); Let. Rul. 9022014 (beneficiary).
(65.) IRC Sec. 170(e).
(66.) IRC Sec. 7701(a)(1); Rev. Rul. 76-270, 1976-2 CB 194. See Rev. Rul. 2002-20, 2002-17 IRB 794 extending the 20-year term limitation for a CRUT beneficiary that meets the definition of "financially disabled."
(67.) Let. Ruls. 9619044, 9710008. See, e.g., Teitel at 245-46, note 4, above.
(68.) See IRC Sec. 1042.
(69.) See IRC Secs. 1042(e), 1014.
(70.) See Let. Ruls. 9547023, 9547022, 9438021, 9438012, and 9234023.
(71.) IRC section 1042(e) provides that: "If a taxpayer disposes of any qualified replacement property, then, notwithstanding any other provision of this title, gain (if any) shall be recognized....." The legislative history provides: "the Act (Section 1042(e)) overrides all other provisions permitting nonrecognition and requires that gain realized upon the disposition of qualified replacement property be recognized at that time." Sen. Rep. 99-313, 1032 (1986), reprinted in 1986-3 CB 1032.
(72.) IRC section 2503(b) allows each individual to make a present interest gift of up to $10,000 (adjusted for inflation in $1,000 increments) to each recipient without current gift tax, or without use of the grantor's estate and gift tax exemption.
(73.) See IRC Sec. 4941(d)(2)(F).
(74.) Treas. Reg. [section]53.4941(d)-3(d)(2), Example 2. See Muller, Private Foundations--Self-Dealing (Section 4941), 89 T.M. A-33 (1994).
Figure 16.1 CHARITABLE REMAINDER UNITRUST INCOME TAX DEDUCTION CALCULATION * Table Rate 6.8% Fair Market Value of Trust $1,000,000 Rate of Annuity 7% Payment Periods in Year 1 Number of Months Valuation Date Precedes First Payout 12 Ages 64, 62 Payout Sequence Factor 0.936330 Adjusted Payout Rate 6.554% Interpolation: Factor at 6.4% 0.23217 Factor at 6.6% 0.22247 Difference: 0.00970 (6.554% - 6.4%)/0.2% = X/0.00970; Therefore X = 0.00747 0.22470 Life Remainder Factor = Factor at 6.4% Minus X: Present Value of Remainder Interest = $1,000,000 $224,700 x 0.22470: Donors' Deduction: $224,700 Donors' Deduction as a Percentage of Amount Transferred 22.470% * Courtesy NumberCruncher Software (http://www.leimberg.com) Figure 16.2 Gross Unitrust Contribution Income from Value at Yr. Age 1 Age 2 to Unitrust Unitrust End of Year 1 64 62 $ 1,000,000 70,000 990,000 5 68 66 0 67,242 950,990 10 73 71 0 63,946 904,382 15 78 76 0 60,812 860,058 20 83 81 0 57,832 817,907 24 87 85 0 55,553 785,678 Totals: $1,000,000 $1,500,253
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|Publication:||Tools & Techniques of Charitable Planning, 2nd ed.|
|Date:||Jan 1, 2007|
|Previous Article:||Chapter 15: charitable remainder annuity trusts.|
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