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Charitable Split Interest Trusts

Charitable Split Interest Trusts. Matt Pugh. Relevant Primary Authority. §664 §170 §1.664-1 §1.664-2 §1.664-3 Rev. Proc. 2007-45 , 2007-2 CB 89 Rev. Proc. 2008-45, 2008-2 CB 224 LEILA G. NEWHALL UNITRUST v. COMM, 79 AFTR 2d 97-547, 105 F3d 482 (CA-9, 1997), 104 TC 236.

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Charitable Split Interest Trusts

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  1. Charitable Split Interest Trusts Matt Pugh

  2. Relevant Primary Authority • §664 • §170 • §1.664-1 • §1.664-2 • §1.664-3 • Rev. Proc. 2007-45, 2007-2 CB 89 • Rev. Proc. 2008-45, 2008-2 CB 224 • LEILA G. NEWHALL UNITRUST v. COMM, 79 AFTR 2d 97-547, 105 F3d 482 (CA-9, 1997), 104 TC 236

  3. What is a Charitable Split Interest Trust? • Provides benefits to a charitable organization and a non-charitable beneficiary • The order of who receives first is important • Bears resemblance to normal individual charitable deductions • Dollar for dollar deduction • Present value of trust assets • Charitable Remainder Trust and Charitable Lead Trust • Annuity trust • Unitrust

  4. Charitable Remainder Trusts • The non-charitable beneficiary receives the benefits first • Remainder is left for the charitable organization • Irrevocable • Tax-free entity • Inter vivos- in life • Testamentary- at death

  5. Charitable Remainder Annuity Trust • 6 requirements to qualify as a CRAT • 6 items necessary to determine valuation • Annuity value • Deduction for charitable contribution • Example problem

  6. CRAT Requirements • Annuity payment must be no less than annually • The amount must be sum certain • % of initial FMV of assets placed in trust • Minimum and maximum payout amount • Minimum amount is 5% • Maximum amount is 50% • Who can be a recipient of a CRAT • Charitable organization- must comply with §170(c) • Non-charitable beneficiary- spouse, child, brother, etc.

  7. CRAT Requirements • Prohibited from making other payments to non-charitable beneficiary • Time period of a CRAT • Inter vivos or testamentary • Length of annuity payment • Life of non-charitable beneficiary or, • Period of no more than 20 years • Having a permissible remaindermen • Must comply with §170(c) • If multiple charities listed, they can receive benefits simultaneously or successively • If necessary an alternate charity can be chosen

  8. Requirements for Deduction Valuation • Donor receives a deduction for the present value of the remainder interest • Initial FMV of assets in trust • Age of beneficiary • Annuity payment percentage • Frequency of payment • §7520 interest rate • Annuity factor

  9. CRAT Example • First, calculate the annuity payment ($100,000 x 5.2%) • Multiply the annuity payment by the annuity factor ($5,200 x 13.3935) • To get the deduction subtract annuity value for the FMV of assets ($100,000 - $69,646)

  10. Table S- Based on Life Table 2000CM§7520 Interest Rate at 5%

  11. Charitable Remainder Unitrust • Differences in first requirement • Unitrust payment: fixed percentage multiplied by FMV of assets valued annually • Allowed to choose the date of valuation • Income exception: total of trust income (not greater than unitrust payment) PLUS excess amount over required unitrust payment • Allowed to do a combination of the two • Difference in calculation of deduction • Same as CRAT but use the unitrust table in IRS Publication 1458, Table U

  12. Unrelated Business Taxable Income • CRTs are tax-free entities • Can cause a large tax liability for the trust • Current Regulation provides an excise tax on UBTI • §512 defines UBTI as gross income earned by organization that is unrelated to its trade or business • Prior to 2009 the UBTI rule was drastically different

  13. LEILA G. NEWHALL UNITRUST v. COMM, 79 AFTR 2d 97-547, 105 F.3d 482 (CA-9, 1997), 104 TC 236 • CRUT endowed three publically traded limited partnership stocks • Income from the stocks were UBTI • Tax Court held and 9th Circuit affirmed • Prior to 2009 Reg. §1.664-1(c) states that if a CRT has UBTI, ALL income from trust is taxed • What impact does this have today?

  14. Charitable Lead Trusts • The reverse of a CRT • Charity receives first then non-charitable beneficiary receives remainder • Receives a present value deduction for the annuity or unitrust • All trust income is taxed to the donor • There isn’t a code section for CLTs

  15. Charitable Lead Annuity Trusts • Rev. Proc. 2007-45, 2007-2 CB 89 outlines a sample CLAT • Inter vivos- in life • Testamentary- at death • Grantor- non-charitable beneficiary is the donor • Nongrantor- non-charitable beneficiary is someone other than donor

  16. Differences between CLAT and CRAT • Taxable entity • Use Table B from IRS Pub. 1457 • No minimum or maximum payout requirement • If Present value of charitable interest exceeds 60% of total amount in trust, an excess holding tax of 10% will be added (§4943) • Can use a fixed dollar amount instead of percentage • Allowed to give extra payments to stated charity • No extra estate and gift tax deduction for extra payments • Entitled to income tax deduction for extra payments

  17. Differences between CLAT and CRAT • If the remainder beneficiary is 2 or more generations apart, CLT subject to generation skipping tax (§2611) • Prohibited from any additional contributions • Non-charitable beneficiary must have a 15% probability of receiving remainder (IRS Pub. 1457)

  18. CLAT Example • Multiply annuity payment by annuity factor ($60,000 x 12.4622) Table B • To get remainder, subtract annuity value from FMV of assets ($1,000,000 - $747,732)

  19. Table B-Term Certain §7520 rate of 5%

  20. Charitable Remainder Unitrust • Rev. Proc. 2008-46, 2008-2 CB 224 outlines a sample CLUT

  21. Differences between CLAT and CLUT • Pays unitrust amount: stated percentage times FMV of assets valued annually • The amount of the deduction is the present value of unitrust payments • Use Table D of IRS Pub. 1458 • Value of FMV of assets can be any day of the year or average of multiple days • Must be consistent year to year • Allowed to have additional contributions

  22. Which Trust Should You Choose? CRT CLT • Tax exempt entity • Provides greater benefit for non-charitable beneficiary • Smaller charitable deduction • Limited contribution % to the annuity or unitrust • Transferring assets to CRTs are more valuable because income is tax free • Taxable entity • Provides a greater charitable deduction • Smaller remainder left to non-charitable beneficiary • No limitations on annuity or unitrust • Better if you are a high income earner

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