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Sunday, May 5, 2024
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Case Studies |
Unraveling the Life Plus Term CRT
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Case:
Quintana, Arizona is the official yarn capital of the world. The city of Quintana in fact produces over 70% of all the yarn sold worldwide. There are six major yarn companies in Quintana with Spun, Inc. being the largest. Spun, Inc. is a family-run business headed by founders David and Mary Kabril. David, 69, and Mary, 68, have lived their entire lives in Quintana and plan to retire there as well. They truly loved the Quintana community and have raised all of their four children there. Not surprisingly, they strongly support the community with their time and charitable contributions.
During a recent consultation with their attorney, the Kabrils wanted to know how they could make a gift to the Quintana Community Foundation. They heard about a trust that could provide income, capital gains bypass, and a charitable deduction. Specifically, they wanted to use $1 million of appreciated stock to fund a trust that would pay income for their lifetimes and then for a period of years pay to their four children. The Kabril's attorney was familiar with CRTs but recalled hearing during a seminar that a life plus term CRT was not permissible.
Question:
Can the Kabrils create a trust that will pay income for their lifetimes and then for a term of years? If so, what special drafting considerations must be made in the CRT document?
Solution:
I.R.C. Section 664 states that a CRT may last for either the lives of the beneficiaries or for a term of years (not to exceed 20 years). Furthermore, Treasury Regulation 1.664-3(a)(5) provides that a CRT may not last for the life of A and then to B for a term of years "because it is possible for the period to last longer than either the lives of recipients in being at the creation of the trust or a term of years not to exceed 20 years." However, the following sentence of the regulation quoted above notes that a CRT that lasts for the life of A and then for the lesser of B's life or a term of years was permissible. The regulations distinguish this latter CRT as valid "because it is not possible for the period to last longer than the lives of recipients in being at the creation of the trust."
Based upon this reading, the Kabril's attorney informed David and Mary that their intentions could be accomplished. A 5% payout CRT would be created to pay income for David and Mary's lifetime. Upon their deaths, the CRT would then pay to their four children for a term of 15 years; however, if all four children did not survive the 15 year term, the CRT would end upon the last child's death. Because of their ages it was unlikely all of the children would pass away before the term of years expired. Nevertheless, it was essential that the CRT be drafted in accordance with Treasury Regulation 1.664-3(a)(5).
As a result of this "life plus term" CRT, the Kabrils received a $200,000 income tax deduction, bypassed $600,000 of capital gains, and will leave a gift to the Quintana community of approximately $2.8 million when the trust ends. Finally, the Kabril family can expect to receive $3.3 million in income from their CRT.
Editor's Note: The "life plus term" CRT is an ideal trust for donors who want to provide for children, yet are uninsurable. Because this trust does provide for children, it is important to realize that the marital deduction could be lost and this trust could subject your clients to gift and estate taxes. Consequently, this trust works best in nontaxable estate situations.
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