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Sunday, April 28, 2024
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Case Studies |
CLAT Charity Desires Gift Now
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Case:
Dennis Collins, Jr., was a Gold Circle member of the local hospital. At his death, Dennis created a 20-year charitable lead annuity trust which he funded with $3 million of stocks. The CLAT had an annual 5% payout or $150,000. The $150,000 was to be distributed to the hospital for the 20-year term. At the end of 20 years Sandy, Dennis's daughter, would receive the trust assets.
Ten years of the twenty-year term have now passed and the trust has grown to $4.5 million. However, the hospital has run into financial difficulties and needs substantial funds now. During a discussion with their tax attorney, the hospital learned that a charitable remainder unitrust income and remainder beneficiary successfully "cashed out" their share prior to the termination of the trust (See PLR 200208039). Excitedly, the hospital wonders, based on the PLR reasoning, if they too could cash out their entire share now instead of receiving an income stream for another ten years.
Question:
Can the hospital elect to terminate Dennis's CLAT early and, therefore, receive their share of the trust immediately? If so, what is the amount that the hospital will receive? How is that amount calculated?
Solution:
Generally, under state law, it is permissible to terminate a trust if all of the vested beneficiaries consent, a local court approves of the termination and in the case of charitable trusts, the attorney general is made a party to the proceeding. However, charitable lead trusts and charitable remainder trusts are created to be in compliance with the tax code and regulations. Therefore, any attempt to alter, reform or revoke a charitable trust should be done based upon legal authority or with approval from the Service.
In PLR 199952093, the Service approved a lump sum distribution to charity from a charitable lead annuity trust. The lump sum distribution to charity was computed by merely adding up the remaining annuity payments that were required to be paid out by the trust. It is crucial to note that the prepayment to charity was determined without discounting the remaining annuity payments. After charity received its entire undiscounted distribution, the lead trust was terminated and the trust assets were distributed to family.
In this instance, Dennis's CLAT has a ten-year remaining term. Each year the trust pays $150,000 to the hospital. Under PLR 199952093, the hospital may receive $1,500,000 in the current year (10 x $150,000). The prepayment distribution would fully satisfy the trust's obligation to the hospital.
Because Sandy wishes to help out the hospital that meant so much to her father, she consents to such a prepayment. Thus, after obtaining court approval, the trustee of the CLAT may distribute $1,500,000 to the much-in-need hospital. Moreover, Sandy feels a sense of pride that she was able to come to the rescue of a charity beloved by her father.
Editor's Note: The undiscounted distribution is very favorable to charity but may not thrill some remainder beneficiaries. It seems reasonable to discount the income stream similar to early terminations of CRTs. However, in Rev. Rul. 88-27, the Service rejected such a suggestion. In that ruling, a donor created a CLAT and included a trust provision which gave the trustee discretion to "commute and prepay" the charitable interest prior to trust termination. The trust provision further stated that the prepayment amount would be computed using the applicable federal rate and the methodology used to determine present value of annuity payments under the Code and Regulations. The Service ruled the discretion to "commute and prepay" failed to qualify the income interest as a guaranteed annuity. Therefore, the trust failed to qualify as a charitable lead annuity trust. Lead trusts today do not include prepayment language. However, the holding in PLR 199952093 seems to suggest that, if a prepayment is allowed, it must be undiscounted. Therefore, it is not advisable to discount the "cashing out" of a lead trust charitable beneficiary without first seeking an independent private letter ruling.
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