Thursday March 28, 2024

4.10.3 Self-Dealing Solutions

Self-Dealing Solutions

Indirect Self-Dealing:  The self-dealing rules are not avoided by using intermediaries, whether individuals or organizations.

Self-Dealing Exceptions:  There are several exceptions to the self-dealing rules.

Self-Dealing Safety Steps:  When a business owner retires, charitable remainder unitrusts (CRUTs) are often used to provide the owner with a life income stream.

In addition to unrelated business income (UBI) and debt, the third common challenge for sales of proprietorships is self-dealing.

Charitable trusts are subject to the self-dealing rules. Sec. 4947(a)(2). The self-dealing rules are triggered when a disqualified person is involved with the charitable trust in a sale, lease, loan or other transaction. Sec. 4941(d)(1).

A disqualified person is the donor or a family member. Family members are defined as lineal ascendants and descendants and their spouses. Sec. 4946(d).

The self-dealing rules are of concern when family members are interested in reacquiring assets transferred to a charitable trust. If part of the objective of business owners is to transfer specific assets to children or other family members, the unitrust is not the appropriate vehicle. An outright gift of part of the asset with sale to the charity or a charitable gift annuity may be an appropriate solution. With both the outright gift and the charitable gift annuity, the public charity owns the property and the self-dealing rules do not apply.

Indirect Self-Dealing


The self-dealing rules are not avoided by using intermediaries, whether individuals or organizations. That is, if a parent transfers land into a charitable remainder unitrust and is interested in selling that land to her daughter, the sale is self-dealing whether done directly or through an intermediary.

Similarly, the daughter may not create a corporation, LLC or other business entity and use that to purchase the land. That would also be a violation of the indirect self-dealing provisions. Reg. 53.4941(d)-1(b)(1).

Self-Dealing Exceptions


There are several exceptions to the self-dealing rules. First, a private foundation may provide goods or services to a disqualified person, so long as the same goods and services at the same price are provided to the general public. Reg. 53.4941(d)-3(b)(1).

Second, it is permissible to make payment for some personal services. These personal services must be reasonable and necessary and the compensation may not be excessive. Reg. 53.4941(d)-3(c)(1).

Example 4.10.3A

Andrew Accountant creates a charitable remainder unitrust (CRUT) and transfers $300,000 of public stock to the CRUT. Each year the CRUT must file Form 5227 with the federal government. Andrew does the four-tier trust accounting and also prepares the trust information tax return. He may be paid a reasonable fee for professional services rendered, even though he is a disqualified person. The theory of this exception is that the trust would need to pay someone a reasonable fee to provide this service and so it is permissible.

Self-Dealing Safety Steps


When a business owner retires, charitable remainder unitrusts (CRUTs) are often used to provide the owner with a life income stream. A combination of a sale and a CRUT is also a common strategy. If the business property is transferred in part to a CRUT and the owner then sells the balance outright, there is at least a potential risk of indirect self-dealing. PLR 9114025. While no explicit case has declared a sale of an undivided interest held in part by a CRUT and in part by the owner impermissible, there are some safety steps that can be taken to minimize self-dealing risk in this circumstance. The obvious goal is to make certain that both the owner and the CRUT receive their fair shares of the sale proceeds.

The first principle is that there may be no personal use of the property. If part of the property is transferred to a charitable trust, the donor must not use any portion of the property.

Second, it is helpful if the CRUT has an independent trustee. Donors should not self-trustee the CRUT when there are divided interests. The independent trustee is charged with the responsibility of ensuring that the CRUT receives its fair share in a sale of the business.

Third, an added level of protection is for the independent trustee to receive title to 100% of the real property. This is accomplished by naming the independent trustee as trustee not only of the unitrust, but also of a revocable trust that owns the rest of the property. The donor is named as beneficiary of the revocable trust. Since the trustee owns 100% of the property, there also is no longer a potential claim by the Service that there should be a discount in valuation for the charitable deduction, since the CRUT holds a partial interest. Also, there is no self-dealing because the donor is not involved with the sale.

Fourth, it is even possible to transfer the assets into a limited partnership and then transfer partnership interests into the CRUT. A final strategy could be a partial sale to the charity. The balance of the real property is then transferred to the CRUT, perhaps with the same charity as trustee. The charity then holds title to 100% and sells the assets.

Case Studies on Self-Dealing Solutions

Swenson "Early" Retirement, Part 3:   Bill and Clara Swenson consider themselves very fortunate. Bill was born in Norway. When he was seven years old, his parents immigrated to America. He attended high school and State College in Northern Minnesota. After he received a business degree, Bill moved back home and started a snowmobile and boating dealership. He and Clara worked very hard and now own two other dealerships. All are proprietorships. They also bought a small hotel and four commercial properties in town.

Private Letter Rulings

PLR 201243015 IRS Rules on Foundation's Proposed Transfer of Property:   Foundation was organized as a Sec. 501(c)(3) organization and classified as a private foundation under Sec. 509(a). Foundation's charitable purpose was to receive and administer funds for religious, charitable, scientific and educational purposes.


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