Thursday March 28, 2024

3.10.6 Gifts from a Charitable Remainder Unitrust During Life

Gifts from a Charitable Remainder Unitrust During Life

Partial Interest Rules:   After the unitrust has been funded, it is permissible to use the trust corpus to make a current gift.

Gift of An Income Interest:   Under state law, the donor has made an irrevocable gift of the remainder interest, but has retained the income interest.

Valuation of UT Income Interest:   Unitrust income and remainder interests are valued using the methods of Reg. 1.170A-7(a) and IRS Publication 1458.

Gift Tax Deduction:   The transfer of the income interest also will qualify for a gift tax deduction.

Gift of Excess Principal:   It should be possible for donors to make occasional gifts from a charitable trust to a charity, so long as the amounts and timing of the gift are determined well after the trust is created.

Partial Interest Rules

After the unitrust has been funded, it is permissible to use the trust corpus to make a current gift. However, the arrangement should not be created to avoid the application of the partial interest rules. Sec. 170(f)(3)(A). For example, it would not be appropriate to create a charitable remainder trust on Monday and then give the income interest to charity on Wednesday of the same week. If the gift of an income interest is contemplated, it should generally be made a year or more after creation of the trust.

Gift of An Income Interest

Under state law, the donor has made an irrevocable gift of the remainder interest, but has retained the income interest. If the donor then transfers part or all of an income interest to a vested remainder recipient, the charity then owns the remainder and the income interest. Under the doctrine of merger, the charity then owns the entire interest in that portion and a distribution of principal may then be made to the charity.

If a donor transfers part or all of his or her interest in the income to a charity, he or she then has relinquished all rights with respect to that portion. Thus, there is a charitable deduction for a gift of his or her entire remaining interest in that portion of the trust. Reg. 1.170A-7(a)(2)(i).

If the gift of the income interest is valued at over $5,000, a qualified appraisal will be required or the charitable tax deduction may be denied. Sec. 170(f)(11)(E)(ii). To meet the "qualified appraisal" standard, the appraiser must meet the requirements in Notice 2006-96; 2006-46 IRB 1.

Valuation of UT Income Interest


Unitrust income and remainder interests are valued using the methods of Reg. 1.170A-7(a) and IRS Publication 1458. Based upon the age or ages of the income recipients on the date of the income interest gift, the applicable federal rate, the frequency of payment, the unitrust corpus value and the unitrust amount, the present value of the income interest may be determined. If the entire unitrust income is transferred to charity, then the amount calculated using the Treasury method is usually the deduction value. Section 664(e) of the code provides that the value of the income interest is based on the stated payout percentage.

Editor's Note: In the past, the valuation of the income interest for a net plus makeup unitrust (NIMCRUT) or net income unitrust (NICRUT) was required to use the lesser of the AFR or the stated unitrust payout percent for the unitrust payout percentage. With the passage of the Protecting Americans from Tax Hikes Act of 2015, however, Sec. 664(e) was amended to provide that the valuation of an income interest in a NIMCRUT or NICRUT is to use the stated payout percent for the unitrust payout percentage.

Gift Tax Deduction

The transfer of the income interest also will qualify for a gift tax deduction. So long as the donor gives an undivided percentage of his or her entire interest, the charitable gift tax deduction will qualify. Reg. 25.2522(c)-3(c).

Gift of Excess Principal

It should be possible for donors to make occasional gifts from a charitable trust to a charity, so long as the amounts and timing of the gift are determined well after the trust is created. For many donors, a gifting strategy would be to give the excess growth to a charity. As the trust corpus grows, those donors who do not need the added income may choose to give the growth to charity. In many respects, the unitrust may function as a very low-cost alternative to the private foundation.

Example 3.10.6A Gift of 20% of Trust

A married couple had created a charitable remainder trust. The trust had grown substantially and the donors did not require income from the entire trust. They requested and received approval to give an undivided 20% of their income interest in the trust to the vested remainder charity. They received a charitable deduction for the value of the income interest. Since the trust was funded with an appreciated property asset, this gift was a transfer of appreciated property. As a capital gain-type gift, the deduction was limited to 30% of adjusted gross income, with a carry forward for five years. PLR 9550026.

Example 3.10.6B Specimen Unitrust Income Interest Gift Language


Trustee
Organization
Address
City, State Zip Code

Re: Charitable Remainder Unitrust ______________


Dear Trustee:

I am currently the income recipient of a one life charitable remainder unitrust that was created on July 4, 2005 with trust grantor George Washington, 123 Main Street, Anytown, Illinois 00000 and initial trustee Charitable Organization, 456 Main Street, Anytown, Illinois 00000. The unitrust federal ID number is __________________.

As life income recipient, I have retained the power under section ________________ of that trust document to add, remove or modify by name or percentage the qualified exempt charitable remainder recipients. I declare my intention through this signed and dated writing to modify the charitable remainder recipients by irrevocably designating a percentage of both income and remainder interests to a qualified exempt charity and retaining the balance of the income interest and the right to modify the charitable remainder recipients for the balance of the trust.

In order to make a charitable gift of part of this charitable remainder unitrust, I hereby irrevocably designate qualified exempt charity ____________________________, of City, State, as the recipient of _____% of both the income and remainder interests in unitrust number _________________.

The trustee is authorized to recognize that under the doctrine of merger of income and remainder interests, the named exempt charity now owns all interests in the specified percentage of this remainder unitrust. Therefore, the trustee may distribute that portion of the trust principal to the named exempt charity.

I understand that this transfer to a charitable organization may qualify under IRC Sec. 170 provisions for a charitable income tax deduction for the present value of the gifted income interest.

Sincerely yours,


____________________________       Date: ____________
      Unitrust Income Recipient

Case Studies on Gifts from a Charitable Remainder Unitrust During Life

In-Kind Distributions to Charity and the Reverse Four-Tier, Part 2 of 2:   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 that would house a state-of-the-art theater and museum.

The Flexible CRT, Part 1:   Ted and Eleanor Reeves, 65 and 64, respectively, both sit on the board of the local hospital. They have been approached about making a substantial lead gift to the hospital. They spoke with Tom Johnson, the hospital's gift planner, about various types of gift planning vehicles. In particular, the Reeves were enthusiastic about the benefits of funding a two-life Charitable Remainder Unitrust. They had a large block of appreciated IBM stock (valued at $500,000 with a $100,000 cost basis) that could be used to fund the CRUT. In addition, Ted and Eleanor are in a 40% combined tax bracket, so they are in desperate need of tax deductions. The Reeves, as a result, suggest to Tom that a CRUT seemed like a good choice. While supportive of their choice, Tom reminded the Reeves that the eventual gift to the hospital would occur in approximately 25 years. Being on the board, the Reeves knew the needs of the hospital. They knew the hospital would like to see smaller current gifts yearly versus a very large gift 25 years from now. Tom suggested using a Grantor (or Non-Family) Charitable Lead Trust, because it would pay income yearly to the hospital and then the stock would revert back to the Reeves. It would provide a charitable tax deduction, however, it would not allow a tax-free sale and diversification of the IBM stock.

The Flexible CRT, Part 2:   It has been three years since the Reeves created their CRUT, and they are still delighted with their decision. In fact, during a recent charity dinner, Ted was raving about all of the benefits his trust provided. A friend and fellow supporter of the hospital, Thelma Bost, was intrigued about the flexibility of the Reeves's Flexible CRUT. Specifically, Thelma wonders if her CRUT has the same 'special provision' as the Reeves. (Ed. See last week's Case Study).

"Cashing Out" Your Unitrust Income Stream:   William Rogers, 60, is a very charitable American. He consistently makes gifts each year to various causes he supports. Ten years ago, William created a Charitable Remainder Unitrust. He funded his unitrust with $500,000 of appreciated stock. The unitrust was drafted to have a 5% payout and a term of twenty years. In addition, William irrevocably designated a local hospital as the charitable beneficiary. William opted for a twenty-year trust over a lifetime trust for two reasons. First, he needed a large tax deduction, and, at age 50, a lifetime unitrust would produce a very small tax deduction. Second, he wanted the local hospital to receive the gift while he was alive. He thoroughly enjoyed giving, and wanted to ensure he would be able to see his gift at work.

Changing a Lackluster NIMCRUT into a Shiny New Gift Annuity:   Megan Moss created a net income plus makeup charitable remainder unitrust (NIMCRUT) about 16 years ago with $1 million of appreciated stocks. Because interest rates were substantially higher at that time, Megan's NIMCRUT was drafted with a 7% payout.

Private Letter Rulings

PLR 200124010 Donor's Early Termination of CRT and Distributions to Charity Approved:   Taxpayer created a Charitable Remainder Unitrust (CRUT). The CRUT was designed to pay 7% of the net fair market value of the trust assets, valued annually, for Taxpayer's lifetime. At Taxpayer's death, the trust document required that the trustee pay Taxpayer's estate a prorated final payment, and then distribute the trust principal to charities A, B, C and D.

PLR 200140027 An Early Division and Distribution of a CRUT to Charity Approved:   Taxpayer created a Charitable Remainder Unitrust (CRUT) several years ago which he funded with appreciated stock. The CRUT was drafted with a 5% payout, which would be paid first to Taxpayer then to Taxpayer's wife if she survived him.

PLR 200205008 Early Termination of a Portion of a NIMCRUT Produces Charitable Tax Deduction:   Husband created a two-life Net Income Plus Makeup Charitable Remainder Trust (NIMCRUT). The NIMCRUT was drafted to pay income to Husband and then to Wife, if she survived Husband. The unitrust income would be equal to the lesser of the trust payout percent or the net income of the trust during that year.

PLR 200208039 Unhappy CRUT Income Beneficiary Allowed to "Cash Out" and Terminate Trust:   Donor created a net plus makeup charitable remainder unitrust (NIMCRUT) to benefit donor and several other income beneficiaries. The NIMCRUT will pay out each year the lesser of the trust net income or 8% of the net fair market value of the trust assets. Donor has now died, and there is only one remaining income beneficiary.

PLR 200441024 Donor "Cashes Out" Her Term-of-Years CRUT:   Terri Taxpayer created a charitable remainder unitrust (CRUT) for her benefit. The CRUT had a term of 20 years and a high 10% payout. After 20 years, all of the CRUT assets would be distributed to Charity. Terri, however, wanted to terminate her CRUT prior to the lapse of 20 years. Moreover, she wanted to "cash out" or accelerate her remaining CRUT income payments at the time of termination.

PLR 200548023 Cash Out of CRUT Not Self-Dealing:   n 1996, Barney established a 16% charitable remainder unitrust (CRUT) for the shorter of his life or a term of 20 years. Barney and all parties involved decided it was in everyone's best interest to terminate the trust and cash-out Barney and the charity. The trustee requested a ruling that the termination would not result in an act of self-dealing and would not subject the trust to the private foundation termination tax.

PLR 200744019 Splitting Unitrust in Two Approved:   H and W created a charitable remainder unitrust (CRUT) under Code Sec. 664(d)(2). Trust provides trustee pay annual amounts to H for life and at his death to W. Trust operates as a FLIP and pays a fixed 9% of the fair market value of the assets valued annually.

PLR 200802024 Surrender of Income Interest in a CRT Results in a Charitable Deduction:   Taxpayers created two charitable remainder unitrusts (CRUTs) on Date X. Later, Taxpayers proposed to surrender their respective interests in the CRUTs to the charitable beneficiary named in both CRUT documents.

PLR 200802032 Cashing Out Charitable Remainder Trust Not Self-Dealing:   M's will directed the creation of a charitable remainder annuity trust (CRAT). The CRAT was to be funded with all of M's assets less her personal property. M's daughter, D, was to receive a 6% income interest for he life from CRAT with the remainder passing to two public charities, C1 and C2.

PLR 200808018 Proposed Trust Division Won't Result in Loss of CRT Status:   T created a net income plus makeup charitable remainder unitrust (NIMCRUT) with T and T's family trust as income beneficiaries and a qualified charitable organization as remainder beneficiary. T proposes to make a contribution of an undivided portion of T's unitrust interest to the charitable remainder beneficiary.

PLR 200809044 Early Termination of NICRUT Not Self-Dealing:   B and C are equal partners in N, a family limited partnership (FLP). N created a net income only charitable remainder unitrust (NICRUT) on date X. On date Y, N decided to terminate the NICRUT by selling its income interest back to the listed charitable remainder beneficiary.

PLR 200814003 Division Does Not Disqualify CRUT:   Husband and Wife created a charitable remainder unitrust (CRUT) with income to be paid to Husband for his life and upon his death to Wife for hers. Within three years of the CRUT's creation, Husband and Wife divorced. Under the terms of the divorce judgment the CRUT was divided into CRUT A and CRUT B.

PLR 200816032 Early Termination Not Self-Dealing; No Termination Tax:   A and B established C, a charitable remainder unitrust as described in Sec. 664(d)3) of the Code. C was created as a net income plus makeup unitrust (NIMCRUT) to pay A and B the lesser of net income or 10% of the trust's net fair market value, with the possibility for recouping lost payments in future years.

PLR 200817039 Early Termination of CRT Not Self-Dealing:   B and C established A, a charitable remainder unitrust under Sec. 664(d)(3). B and C served as trustee of A and D served as an independent special trustee. D resigned and an appointment of a successor was not required under the trust terms.

PLR 200824022 Division of CRT is Not Taxable:   H created Trust X as a charitable remainder unitrust (CRT) under Sec. 664(d)(2). Trust X directed the trustee to make unitrust payments to H for his lifetime and then to W, H's surviving spouse, for her lifetime. Upon the death of H and W, the trustee would distribute the remainder to a qualified charitable organization.

PLR 200833012 Early CRT Termination Not Self-Dealing:   A created a charitable remainder unitrust (Trust) naming A and A's spouse, B, as income beneficiaries. The trust was established as a net income plus makeup trust and the trustee was directed to make lifetime payments to the beneficiaries at the lesser of trust net income or a percent of the net fair market value of trust assets as valued annually.

PLR 200834013 Income Interest Transfer Qualifies for Deduction:   On Date 1, Husband (H) and Wife (W) created Irrevocable Trust which provided income to H and W for their lives and, upon the death of the survivor of them, would distribute the remaining balance to the charitable organizations designated by H and W.

PLR 200841040 Termination of CRUT Not Self-Dealing:   Grantor created Trust on Date X, a grantor trust upon which Grantor paid the tax each year. At Grantor's death, Trust was split into CRUT A and CRUT B, charitable remainder unitrusts within the meaning of Reg. 1.664-4. CRUT A was to pay 5% of its net income as determined annually to A for life and then to B if then living.

PLR 200846037 Termination of CRT to Create a Supporting Organization - No Termination Tax:   A was a Net Income plus Make-up Charitable Remainder Unitrust with a flip provision. B and C were the income beneficiaries and D was the remainder beneficiary of A. On Date X, B and C decided it was in their best interests, and that of D's, to terminate A early and distribute the remainder to E, a supporting organization to D. Therefore, B and C modified A to list E as the sole remainder beneficiary, replacing D.

PLR 200902012 Service Permits Division of CRT:   Husband and Wife (H and W) created a charitable remainder unitrust (Trust) on date X. Upon receipt of a dissolution of marriage decree, H and W obtained permission from the Superior Court to divide Trust into two separate trusts subject to receiving a favorable letter ruling from the Service.

PLR 200912036 CRT Early Termination Not Self-Dealing:   B and C established a net-income-plus-makeup charitable remainder unitrust (NIMCRUT), A, to pay for the lives of B, C, D and E. Payments are to be distributed first to B and C for their joint lives and the survivor, and then to D and E in equal shares until the death of the survivor.

PLR 201249002 Donor Is Entitled to Deduction for Donation of CRT Payment to Charity:   Donor and Spouse created a charitable remainder trust ("Trust") under the laws of State. Trust provided an annual payment to Donor and Spouse ("Trust Payment"). Spouse died leaving Donor as sole trustee of trust and sole beneficiary of Trust Payment.
PLR 9550026 Gift of Portion of Unitrust Income Interest:   In PLR 9550026 the donors had previously created a charitable remainder unitrust. Since the trust had grown substantially, they thought that their desire to make a $1,000,000 gift to a university could be accomplished by giving 20% of their interest in the trust. The Service allowed them to give an undivided 20% of their income interest and receive a tax deduction for that value, based on a factor calculated using their ages and 20% of trust fair market value on the date of the gift. Since the university was the remainder recipient and now held both the income and remainder interests in the 20% of the trust that equaled $1,000,000, that amount could be severed from the trust and used to fund the new building.

PLR 9721014 Gift of Unitrust Income Interest:   When a unitrust is created, the donors retain the rights to an income interest and the charity receives irrevocably the remainder interest. This income interest retained by donors is a property right under state law and thus should be transferable like any other property rights. The Service allowed the donors to transfer their income interest to the remainder recipient. When the income interest is transferred, since it is their only interest in the trust, there will be a charitable deduction under Sec. 170 of the Code for the value of the income interest gifted. To calculate that interest, run the unitrust again with the value on the date of the gift of income interest. The deduction is the income value. For example, if the trust was originally $400,000, but has grown to $500,000, run the deduction with the $500,000 value, the current date and the current Rate of the Month. If the remainder value is $200,000, their deduction is $300,000. The $500,000 total value less the $200,000 remainder value equals the $300,000 gift deduction. This is of course an appreciated-type gift deductible to 30% of AGI. Since the charity now owns both the income and the remainder interest, under the doctrine of merger, the trust no longer exists and the charity may use the trust principal for appropriate charitable purposes.


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