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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. - PowerPoint PPT Presentation
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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
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
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
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
CRAT Requirements1. 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.
CRAT Requirements4. Prohibited from making other payments to non-
charitable beneficiary5. 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
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
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)
Life
Age Annuity Estate Remainder
55 13.3935 0.66968 0.33032
56 13.1536 0.65768 0.34232
57 12.9089 0.64545 0.35455
58 12.6600 0.63300 0.36700
59 12.4064 0.62032 0.37968
60 12.1477 0.60739 0.39261
61 11.8844 0.59422 0.40578
62 11.6170 0.58085 0.41915
63 11.3459 0.56729 0.43271
64 11.0711 0.55355 0.44645
Table S- Based on Life Table 2000CM§7520 Interest Rate at 5%
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
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
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?
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
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
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
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)
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)
5.0%
Years Annuity Income Interest Remainder1 0.9524 0.047619 0.952381 2 1.8594 0.092971 0.9070293 2.7232 0.136162 0.8638384 3.5460 0.177298 0.8227025 4.3295 0.216474 0.783526 6 5.0757 0.253785 0.7462157 5.7864 0.289319 0.7106818 6.4632 0.323161 0.6768399 7.1078 0.355391 0.644609
10 7.7217 0.386087 0.613913
11 8.3064 0.415321 0.58467912 8.8633 0.443163 0.55683713 9.3936 0.469679 0.53032114 9.8986 0.494932 0.50506815 10.3797 0.518983 0.481017
16 10.8378 0.541888 0.45811217 11.2741 0.563703 0.43629718 11.6896 0.584479 0.41552119 12.0853 0.604266 0.39573420 12.4622 0.623111 0.376889
Table B-Term Certain §7520 rate of 5%
Charitable Remainder Unitrust Rev. Proc. 2008-46, 2008-2 CB 224
outlines a sample CLUT
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
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
CRT CLT