Charitable Remainder Trust Update

IRS Keeping Close Watch On Popular Estate Planning Tool.

ADVANTAGES OF A CHARITABLE REMAINDER TRUST ("CRT")
By setting up a CRT, a donor can avoid currently paying tax on the disposition of appreciated assets and invest the sale proceedsto generate a future income stream. The donor forms a CRT and contributes assets (such as appreciated stock) to it. The donor receives an income tax charitable deduction (as well as a gift or estate charitable deduction) when the CRT is created. The amount of the deduction is measured by the actuarial present value of the charity’s right to receive the corpus on termination of the noncharitable (remainder) interest. The CRT sells the stock but does not pay tax on the gain, because the CRT is generally a tax-exempt entity under IRC § 664(c). The CRT then invests the proceeds of the stock sale and pays the donor an income stream for a fixed term of years (or over the course of a life or lives), based either on the value of the assets at the time the trust is created (annuity trust) or a fixed percentage of asset value each year going forward (unitrust). Any gain is taxable to the income beneficiary only when it is distributed. On completion of the term, the CRT distributes the remaining assets to a charity, which can include a private foundation established by the donor. If the donor retains an interest in the trust for life, the assets remaining in the CRT at death are deductible for estate tax purposes.

Another type of charitable trust is the charitable lead trust (CLT), which pays an income stream to the charity on the front end, with a remainder interest payable to noncharitable beneficiaries. CLTs are generally used to minimize gift and estate tax.

EXECUTIVE SUMMARY

• Charitable remainder trusts (CRTs) are a favored way for donors to receive a charitable deduction of the present value of a future donation while retaining an annuity or unitrust income.

• CPA tax advisers should be aware of recent guidance on CRTs concerning unrelated business taxable income (UBTI), pro rata division of CRTs and a type of transaction involving a CRT that the Service has designated a “transaction of interest.”

• The IRS issued final regulations modifying the regime for UBTI received by CRTs. For tax years beginning after Dec. 31, 2006, a CRT that receives UBTI in a tax year is liable for a 100% excise tax on UBTI but retains its tax-exempt status.

• In a revenue ruling, the IRS addressed pro rata division of a CRT with two or more income recipients into new trusts. Generally, CRTs may be divided without termination or other penalties and the bases of assets carried over to the new trusts.

• In the “transaction of interest,” a CRT with highly appreciated, low-basis assets sells them and replaces them with new assets. The income and charitable beneficiaries then sell their interests in the CRT to a third party. The income beneficiary recognizes little or no gain on the transaction by claiming an exception to the no-basis rule of IRC § 1001(e).

A CRT “TRANSACTION OF INTEREST”

Certain transactions involving a CRT that the IRS considers as manipulating the uniform basis rules may be deemed to have a potential for abuse and avoidance of tax on gain from the sale of appreciated assets. In Notice 2008-99, 2008-47 IRB 1194, the IRS described such a transaction involving the creation of a CRT and the subsequent sale of the interests in the CRT to a third party. Because of the potential for tax avoidance, the IRS has labeled it and substantially similar transactions “transactions of interest” for purposes of Treas. Reg. § 1.6011-4(b)(6).

For More Information Contact The Atlanta, Georgia Law Offices Of AttorneyBritt:

AttorneyBritt
Gary L. Britt, CPA, J.D.
1200 Abernathy Road, Suite 1700
Atlanta, Georgia 30328

404-567-6445

“Lawyer's That Mean Business”

IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

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