Friday March 29, 2024

3.5.6 Gift/Estate Tax Deductions for Lead Trust

Gift/Estate Tax Deductions for Lead Trust

Lead Annuity Trust:   The lead annuity trust deduction for a term of years trust is calculated using Table B of IRS Pub. 1457.

Lead Unitrust:   A lead unitrust also qualifies for a charitable gift or estate tax deduction.

Lead Trust for One or More Lives:   A lead trust may be written for one or more lives.

A charitable lead unitrust or annuity trust must pay the fixed unitrust percentage or the fixed annuity to one or more qualified charities each year to qualify for gift or estate tax charitable deductions. Reg. 20.2055-2(e)(2). Reg. 25.2522(c)-3(c)(2).

Lead Annuity Trust


The lead annuity trust deduction for a term of years trust is calculated using Table B of IRS Pub. 1457. Based upon the applicable rate and the selected term of years, it is possible to determine the present value factor for the annuity trust payout. This factor is then adjusted if the annuity is paid other than annually. The adjusted factor is multiplied times the annuity trust payout. This result is the present value of the annuity to charity and is also the value of the charitable deduction for gift or estate tax purposes.

The Applicable Federal Rate may be selected from the current month or either of the prior two months. Sec. 7520(a). For a lead annuity trust, the lower Applicable Federal Rate results in a larger value to charity and a smaller remainder interest. Since the remainder interest is the taxable gift to family, it is desirable to use the lowest of the three permissible Applicable Federal Rates.

Lead Unitrust


A lead unitrust also qualifies for a charitable gift or estate tax deduction. The selected payout percentage is adjusted for the payout period and the time between the valuation date and the first payout date in the first full calendar year. Note that the first partial year is disregarded. Reg. 1.664-4(e)(3).

Based upon the adjusted payout rate, the factor for a term of years unitrust is obtained for the payout rates above and below the adjusted rate from IRS Pub. 1458, Table D. After interpolation of the rates, the resulting factor is then multiplied times the gift amount. This result is the remainder value, or the taxable gift to the remainder beneficiary. Subtracting the remainder value from the gift amount produces the present value of the unitrust income amounts to charity.

Lead Trust for One or More Lives


A lead trust may be written for one or more lives. The lead trust may be written for the life of the donor, the lives the donor and spouse or for a person who is a common ancestor of all remainder recipients. The one- or two-life lead trust will normally be calculated using the one- and two-life tables from Pub. 1457 for annuity lead trusts and Pub. 1458 for unitrust lead trusts.

However, if there is a potential for exhaustion of an annuity lead trust due to a payout higher than the adjusted Applicable Federal Rate, an exhaustion test must be utilized. The exhaustion test will determine the value of the annuity if there is the possibility of exhaustion prior to the measuring life reaching age 110. See Reg. 25.7520-3(b)(3).

In addition, for a lead trust for one or more lives, the table factors from IRS Pub. 1457 and 1458 must normally be used, unless an individual is terminally ill. An individual is defined as terminally ill if there is at least a 50% probability that the person will die within one year. Reg. 25.7520-3(b)(3). However, if the individual survives more than 18 months, there is a presumption that the person was not terminally ill at the time the gift was completed.

Case Studies on Gift/Estate Tax Deductions for Lead Trust

Impatient CLAT Beneficiary Wants Inheritance Now:   Sandy Collins, 45, is a corporate attorney for a mid-sized law firm in downtown Cityville. Sandy comes from a very wealthy and charitable family. In fact, her late father, Dennis Collins, Jr., was a Gold Circle member of the local hospital, university and museum.

CLAT Charity Desires Gift Now:   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.

Southern Brat Delicious Lead Trust Bailout:   Peter and Sue Olson were raised in the great North Country. After college, they were married, and Peter accepted a position with one of the nation's largest discount stores. He rose through the ranks and finally was promoted to be manager of the New Orleans branch of the store.

Private Letter Rulings

PLR 199915058 Testamentary Lead Trust Reformation Under Sec. 2055(e):   Since many charitable trusts in wills fail to qualify under IRC provisions in effect as of date of death, Sec. 2055(e)(3) permits reformation and qualification of lead and remainder trusts. This 1997 testamentary lead trust required reformation. The reformed trust pays an annuity equal to 9.612% of the initial net fair market value of trust assets for a term of 18 years. While the payout is to a family foundation, there will still be a full charitable estate deduction under Sec. 2055 for the present value of the annuity payouts.

PLR 199947022 Lead Trust Plus Disclaimer Lead Trust Approved:   A woman's will created a testamentary 20-year charitable lead trust with a transfer of the remainder to her son. However, there is also a second lead trust that may be funded through exercise of a valid disclaimer by the son.

PLR 199952093 Lead Trust Commutation Approved With Full Annuity Payments:   Charitable lead trusts are qualified if they pay an "annuity amount" to a charity. Normally, annuity lead trusts will pay to charity for a term of years and then distribute the remainder to children or grandchildren. If the trustee is very successful in investments, there may be significant aggregation of trust value and the ability to pay the annuity to charity at an earlier date. This would accelerate both the benefit to the charity and the benefit to family.

PLR 200138018 Charitable Lead Annuity Trust Not Included in Donor's Estate:   Taxpayer created a family (non-grantor) charitable lead annuity trust, which was funded with publicly traded stock. The trust was to last for 10 years and had an 8% annuity payout. In addition, the trust document stated that the taxpayer - as well as taxpayer's spouse - was not permitted to serve as trustee of the CLAT.

PLR 200306008 CRAT With CLAT-Type Payout Produces Two Charitable Estate Tax Deductions:   Doug Donor created a testamentary trust that would benefit son and university. Specifically, son would receive a fixed amount each year from the trust and, upon his death, the trust assets would be distributed to university. Donor died and the trust was subsequently funded. The trust contained many of the required provisions of a charitable remainder annuity trust (CRAT). However, the trust failed to meet the minimum 5% annuity payout requirement. Therefore, trustees petitioned State Court to reform the terms of the trust to comply with Sec. 664.

PLR 201323007 Gift Tax Consequences of Charitable Lead Trust:   Taxpayer created a charitable lead annuity trust ("Trust") with Son 1 as sole trustee and a guaranteed annuity amount to be paid to a private foundation ("Foundation") founded by Taxpayer and Spouse for a term of years. Directors of Foundation are Taxpayer, Spouse, Son 1 and Son 2.

PLR 9734057 No Commutation of Lead Trust:   The Service has generally been reluctant to allow commutation of lead trust payments. In theory, under state law, both the income and remainder recipients own property interests. Thus, it should be permissible to buy or sell those interests at a fair value. Nevertheless, the Service has been reluctant to allow major changes in irrevocable trusts. Specifically, the Service has been reluctant to allow charitable lead trusts to accelerate payments to charities and, thereby, accelerate the remainder interests to families. In the view of the Service, allowing this commutation or acceleration of payments would be "inconsistent with the regulatory requirements for charitable lead interests." Thus, commutation does not seem to be a viable option.

PLR 9840036 Testamentary Lead Trust Drafting Provisions:   The testator and spouse desire to establish a lead trust upon the demise of the survivor. The Service rules that the present value of the unitrust interest in a testamentary charitable lead trust will qualify for an estate tax charitable deduction upon the survivor's death. The term of the charitable lead unitrust is to be set at the surviving spouse's death by calculating the amount necessary to produce an initial value for the remainder interest equal to the surviving spouse's available generation-skipping transfer tax exemption. The Service observes that the formula for determining the term of the charitable lead unitrust will be fixed and ascertainable as of the surviving spouse's death. With respect to generation-skipping transfer tax, the charitable lead unitrust will have an exclusion ratio of zero if the appropriate amount of the surviving spouse's exemption is allocated to the trust. Finally, the ordering rules for the payment of the unitrust amount will be disregarded for federal income tax purposes.


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