Friday March 29, 2024

4.8.3 Self-Dealing Issues

Self-Dealing Issues

Potential Self-Dealing with Lease UBI Solution:  When a limited liability company (LLC) contributes assets to a CRT and employs the lease unrelated business income (UBI) solution discussed in GiftLaw Pro 4.8.2 to ensure that all income paid to the CRT is passive, potential self-dealing issues arise.

Potential Self-Dealing with Sale of Assets in CRT:  After a CRT receives assets from an LLC, the trustee may wish to sell those assets

Who is a Disqualified Person?  Whether someone is a disqualified person with respect to a CRT is determined by facts and circumstances.

A charitable remainder trust (CRT) is prohibited from engaging in any direct or indirect transaction with a disqualified person. Sec. 4941.

Potential Self-Dealing with Lease UBI Solution


When a limited liability company (LLC) contributes assets to a CRT and employs the lease unrelated business income (UBI) solution discussed in GiftLaw Pro 4.8.2 to ensure that all income paid to the CRT is passive, potential self-dealing issues arise. Specifically, if the LLC leases its assets to someone who is a disqualified person with respect to the CRT, once the assets are contributed to the CRT the disqualified person's lease and lease payments to the CRT violate the self-dealing prohibitions. If LLC assets will be used to fund a CRT, it is important to first lease them to a non-disqualified person.

Potential Self-Dealing with Sale of Assets in CRT


After a CRT receives assets from an LLC, the trustee may wish to sell those assets. Self-dealing rules prohibit the CRT from selling the assets back to the LLC or to any other disqualified person. As a result, prior to accepting a gift of the LLC assets, a CRT trustee may wish to consider whether or not it will be able to sell the assets to an unrelated party. (Note that a charity is not subject to self-dealing restrictions. Thus, with an outright gift to charity, it may sell LLC assets back to the donor so long as the transaction is reasonable, for fair market value, and not pursuant to a prearranged plan).

After an LLC contributes assets to a CRT, the LLC and CRT each own assets that later may be sold to a single purchaser. If the LLC and CRT jointly list and sell those assets to a third-party purchaser, there is some concern that self-dealing might occur because the LLC benefits from the joint sale. It is generally agreed that in this situation any benefit to the disqualified person will be incidental or tenuous and therefore not self-dealing. Reg. 53.4941(d)-2(f)(2).

Nevertheless, so that no self-dealing occurs in the event of a such a joint sale, it is important that the CRT and LLC (1) not be controlled by the same person(s), (2) each independently participates in the sale, and (3) each receives proceeds from the sale proportionate to the respective ownership of assets sold. It is also important to be sure that the purchaser is not a disqualified person with respect to the CRT.

Who is a Disqualified Person?


Whether someone is a disqualified person with respect to a CRT is determined by facts and circumstances, but generally, disqualified persons include the LLC itself, anyone who owns more than 20% of the LLC, a trustee of the CRT or a family member of any disqualified person (not including his or her brothers and sisters). Sec. 4946.

Case Studies on Self-Dealing Issues

Grizzly Gordon and the Ranch LLC, Part III:   Grizzly Gordon grew up in the Big Sky country. He loves the mountain and plain vistas of this beautiful ranching country. During his youth, Grizzly acquired his nickname by discovering a grizzly bear that had gotten too near his cattle. Grizzly felled the bear with one well-aimed shot and all his neighbors called him Grizzly after that experience.

Private Letter Rulings

PLR 200043047 Unitrust May Invest Through Family LLC:   Donors created 15 charitable remainder unitrusts (CRUTs) for their three children and 12 grandchildren. Subsequently, the family established a limited liability company (LLC) to invest family assets. The 15 CRUTs propose to invest in the LLC. The benefits will include diversification, pooling of assets, obtaining economies of scale and access to investments with higher minimums.

PLR 200124029 CLAT's Installment Sale to Disqualified LLC Not an Act of Self-Dealing:   Taxpayer created an estate plan where, at his death, his property would pass to a marital trust for the benefit of his wife. At his wife's death, the marital trust would distribute assets to children and five charitable lead annuity trusts (CLATs). Each CLAT was designed to generate an estate tax deduction equal to 100% of the estate tax value of the CLAT assets. In short, the transfer to the CLATs would not generate any estate tax liability.

PLR 200207028 No Self-Dealing Where Disqualified Person Purchases LLC Interests From Charitable Lead Trusts:   H and W created a trust during their lifetimes. Upon H's death, the trust was divided into a survivor's trust and a decedent's trust. The decedent's trust was primarily to benefit W's children and grandchildren. However, the survivor's trust was to benefit an individual during W's lifetime, but at W's death would fund a charitable lead unitrust (CLUT) and a charitable lead annuity trust (CLAT). Both charitable lead trusts (CLTs) were designed to benefit W's private foundation, with the eventual remainder to W's family.

PLR 200720021 Redemption of Stock from CRT by Disqualified For-Profit is Not Self-Dealing:   A is a for profit corporation with common stock owned by B, C and X. B is a charitable remainder unitrust formed by X and Y under the meaning of Sec. 664(d)(2). C is an employee stock ownership plan. X is a trustee of B and the sole unitrust income beneficiary. A offers to redeem for cash, the common stock held by all shareholders.

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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