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Published byLouisa Spencer Modified over 9 years ago
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CHARITABLE SPLIT INTEREST TRUSTS Matt Pugh
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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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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
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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
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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
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CRAT Requirements 1. Annuity payment must be no less than annually The amount must be sum certain % of initial FMV of assets placed in trust 2. Minimum and maximum payout amount Minimum amount is 5% Maximum amount is 50% 3. Who can be a recipient of a CRAT Charitable organization- must comply with §170(c) Non-charitable beneficiary- spouse, child, brother, etc.
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CRAT Requirements 4. Prohibited from making other payments to non- charitable beneficiary 5. 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 6. 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
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Requirements for Deduction Valuation Donor receives a deduction for the present value of the remainder interest 1. Initial FMV of assets in trust 2. Age of beneficiary 3. Annuity payment percentage 4. Frequency of payment 5. §7520 interest rate 6. Annuity factor
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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)
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Life AgeAnnuityEstateRemainder 5513.39350.669680.33032 5613.15360.657680.34232 5712.90890.645450.35455 5812.66000.633000.36700 5912.40640.620320.37968 6012.14770.607390.39261 6111.88440.594220.40578 6211.61700.580850.41915 6311.34590.567290.43271 6411.07110.553550.44645 Table S- Based on Life Table 2000CM §7520 Interest Rate at 5%
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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
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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
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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 9 th 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?
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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
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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
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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
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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)
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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)
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5.0% Years Annuity Income Interest Remainder 1 0.9524 0.047619 0.952381 21.85940.0929710.907029 32.72320.1361620.863838 43.54600.1772980.822702 54.32950.2164740.783526 65.07570.2537850.746215 75.78640.2893190.710681 86.46320.3231610.676839 97.10780.3553910.644609 107.72170.3860870.613913 118.30640.4153210.584679 128.86330.4431630.556837 139.39360.4696790.530321 149.89860.4949320.505068 1510.37970.5189830.481017 1610.83780.5418880.458112 1711.27410.5637030.436297 1811.68960.5844790.415521 1912.08530.6042660.395734 2012.46220.6231110.376889 Table B-Term Certain §7520 rate of 5%
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Charitable Remainder Unitrust Rev. Proc. 2008-46, 2008-2 CB 224 outlines a sample CLUT
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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
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Which Trust Should You Choose? 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 CRTCLT
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