Monday, April 29, 2024
Case Studies

In-Kind Distributions to Donors, Part 1 of 2

Case:

Jim Thompson, a retired engineer, and his spouse Logan Thompson, a retired nurse, are currently considering funding a term-of-years charitable remainder unitrust with Americans for the Arts charity. Americans for the Arts is raising money for the construction of a new building which would house a state-of-the-art theatre and museum. The Thompsons, while retired, are active investors and have amassed quite a fortune over the past few years. In particular, they have investments in numerous established technology companies that have quadrupled in value over the past two years. They would like to use $800,000 of stocks with a cost basis of $100,000 to fund a five-year CRUT with a 15% payout. However, they believe these companies are great investments with acceptable risk and prefer that the trustee of the CRUT not sell these stocks. Furthermore, the Thompsons would like their CRUT payouts to be the actual stock - an in-kind distribution - as opposed to cash payouts. Thinking creatively, the Thompsons then wonder if such a distribution would avoid capital gain since technically the stock has never been sold.

Question:

Can the Thompsons accomplish their goal of a tax-free 'in-kind' distribution of their technology stock? What are the tax consequences to the CRUT and the Thompsons of such a transaction?

Solution:

Reg. 1.664-1(d)(5), which deals with distributions in-kind, states that the amount paid shall be considered as an amount realized by the trust from the sale of the property. With respect to the Thompsons, their basis in the stock will be its FMV at the time it was paid to them. Therefore, the trust has an amount transferred of $120,000 (800,000x15%) in its first year. The trustee will realize $105,000 of the $120,000 as capital gain and $15,000 (100,000/800,000x120,000) as corpus. Under the 4-tier accounting rules of Sec. 664(b), the Thompsons will report $105,000 of capital gain and the remaining $15,000 will not be taxable. Finally, the Thompsons new basis in the stock will be $120,000, which was its FMV at the time it was distributed.

Under this plan, the Thompsons receive a partly tax-free distribution. However, when taking into account their income tax deduction of $370,000, $500,000 plus of income over the five-year term, and a gift to Americans for the Arts in excess of $550,000, the Thompsons are very pleased with this arrangement. Because of their wonderful generosity the Thompsons have the gratification of knowing they helped build a monument that will last a lifetime.

Related Topics On In-Kind Distributions to Donors, Part 1 of 2

2.2.2  Gift/Sale of Stock:    The gift/sale of stock is logistically quite easy to accomplish. Shares of stock are divisible. Most shares of public stock are now held in street accounts. The desired number of shares may be transferred directly through a financial services firm to the qualified charity.


3.10.2  Four-Tier Accounting:    Unitrust payouts are one of the most important areas for the advisor to communicate to the recipient. With a charitable remainder trust, the basic payout rule is that the unitrust percentage is multiplied times the trust value and that amount is then distributed. The distribution may be monthly, quarterly, semiannually or annually.


4.12.1  Public Stock:    During the past century, public stocks held over a long period of time have proven to be the safest type of investment with the greatest return. While it is certainly true that stocks have fallen rapidly and dramatically for the periods 1929-1932, 1973-74, 1987 and 2000-2002, the long-term stock investor has been very successful.


4.2.2  Asset Sale with Unitrust:    The C corporation is a separate taxpayer. It tracks depreciation and basis of all assets at the corporate level and pays tax on income and gains.


8.2.2  CRT Payouts and Four-Tier Accounting:    Payouts from charitable remainder trusts (CRTs) are taxable to most recipients. However, the taxable amount and the tax rate of these payouts may vary greatly from year to year. Because of this uncertainty, it is very difficult to predict the exact amount of tax that a CRT beneficiary will owe each year.



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