Thursday April 25, 2024
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6.2.2 Annuity Trust for a Term of Years
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A charitable remainder annuity trust (CRAT) may be created for a term of years not exceeding 20. Reg. 1.664-2(a)(5)(i). The term of years must be ascertainable at the trust creation and the trust will pay out for the entire term of years selected. The trust, however, may be terminated early because of the income beneficiary's death or a donor's power of revocation. Reg. 1.664-2(a)(5)(i). A CRAT must pay a minimum of 5%, but not more than 50% of the initial net fair market value of all property placed in the trust, at least annually to one or more persons. Sec. 664(d)(1). In addition, a CRAT must produce a charitable deduction equal to 10% or more of the initial net fair market value of the trust corpus.
Calculating the Charitable Income Tax Deduction
The regulations in Sec. 664 outline the method for determining the charitable deduction for a CRAT. The fair market value of the contributed property, the corresponding trust payout rate, the applicable federal rate (AFR), the beneficiary's age and the payment frequency are all needed to perform the deduction calculation.
To illustrate how the deduction is calculated, consider Jane Donor who creates a charitable remainder annuity trust on June 1, 2017 with her favorite charity. Jane is 68 years old and wants to create a 20-year CRAT. The fair market value of the property transferred to the CRAT is $100,000. Jane's trust has a payout rate of 5.0%. The AFR for the month of June is 2.4% and Jane has selected quarterly payments. Using this information and IRS Pub. 1457, the charity's gift planner creates the following charitable deduction worksheet.
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| Remainder Annuity Trust for Term of 1-20 Years |
| Election: Sec. 7520(a) election made using April 2.6% AFR |
| Donor: |
Jane Donor |
Gift Amount: |
$100,000 |
Gift Date: |
6/1/2017 |
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| Beneficiary: |
Jane Donor |
Term of Years: |
20 |
Initial Trust% |
5.0 |
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| Payment Frequency: Quarterly (Payments at End of Selected Period) |
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| (A) Annuity Trust Payout: |
$5,000 |
(A) |
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| AFR: 2.6% |
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| (B) Factor: |
15.4429 |
(B) |
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| Term of Years: 20 |
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| IRS Pub. 1457, Table B |
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| (C) Adjustment for Time of Payment: |
1.0097 |
(C) |
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| (IRS Pub. 1457, Table K) |
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| End of Period |
| 1 |
Annual |
1.0000 |
| 2 |
Semi-Annual |
1.0065 |
| 3 |
Quarterly |
1.0097 |
| 4 |
Monthly |
1.0119 |
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| (D) Adjusted Factor: |
15.5927 |
(D) |
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| Line(B) x
Line(C) |
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| (E) Present Value of Annuity: |
$77,964 |
(E) |
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| Line(D) x
Line(A) |
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| (F) Amount Transferred to Trust: |
$100,000 |
(F) |
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| (G) Present Value Remainder: Charitable Deduction |
$22,037 |
(G) |
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| Line(F)
Less Line(E) |
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| (H) Tax Bracket & Savings: 24% |
$5,289 |
(H) |
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The charitable deduction worksheet provides Jane's personal data, information about her annuity and the calculations used to arrive at her charitable deduction and tax savings. The first box delineates general information about Jane, including her name, age, payment frequency and gift amount. This information is used in calculating her charitable tax deduction.
The second box provides the steps taken to determine the charitable tax deduction for Jane's gift. The steps are identified in Lines (A) through (H).
(A) To calculate the amount the annuity trust will pay Jane, the annuity trust payout percentage is multiplied by the fair market value of the property transferred to the trust. The annuity trust payout of 5% is multiplied by the $100,000 gift, which produces an annuity trust payout of $5,000. This means that Jane will receive $5,000 annually, regardless of the value of the trust in any given year. Because Jane has chosen quarterly payments, she will receive four payments of $1,250 each year. The AFR for the month of the gift or either of the two prior months may be used to determine the charitable deduction under Sec. 7520. For an annuity trust, a higher AFR produces a greater deduction, so Jane's gift planner selects April's 2.6% AFR.
(B) The annuity factor must be determined to calculate the deduction. The annuity factor for a term of years CRAT is provided in IRS Pub. 1457, Table B. Using the AFR as the interest rate and finding the term of years along the left side of the table, the table shows an annuity factor of 15.4429.
(C) The next step is to determine the time adjustment factor. An adjustment must be made based on the payment frequency selected. The time adjustment factor is found in Pub. 1457, Table K by locating the appropriate AFR (2.6%) along the left side of the table and using the corresponding payment frequency (quarterly). Here, the time adjustment factor is 1.0097.
(D) The time adjustment factor is multiplied by the annuity factor to calculate the adjusted annuity factor. In the worksheet above, Line (B) is multiplied by Line (C). The annuity factor of 15.4429 is multiplied by Jane's adjustment factor of 1.0097 to arrive at an adjusted annuity factor of 15.5927.
(E) Once the adjusted annuity factor is known, the present value of the annuity must be determined. The fair market value of the property transferred to the annuity trust is multiplied by the adjusted annuity factor. Line (D) is multiplied by Line (A). The adjusted annuity factor of 15.5927 is multiplied by the $5,000 annuity trust payout to produce a present value of $77,964.
(F) The amount transferred to the trust is the amount of cash or the fair market value of the property contributed. The funding amount of Jane's CRAT is $100,000 cash.
(G) Finally, the present value of the annuity is subtracted from the fair market value of the annuity trust property. Line (E) is subtracted from Line (F). The resulting number equals the charitable deduction. The $100,000 funding amount less the $77,924 present value produces a charitable deduction of $22,037.
(H) To determine the tax savings, Jane's tax rate of 24% is multiplied by the charitable tax deduction of $22,037 to produce a tax saving of $5,289. The tax savings provides a dollar-for-dollar offset on Jane's tax bill.
All of this information can be found in the charitable deduction worksheet accompanying the CRAT proposal in Crescendo Software Program 49. An explanation of each item is in the professional advisor text.
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Private Letter Rulings
PLR
199903001 Charitable Remainder Annuity Trust and Special-Needs Trust:
The parent of a disabled child desired to leave one-half interest in a home outright to charity, with a life estate in the other one-half interest to a special-needs trust for the life of the child and the remainder interest from this trust to charity. Other assets are to go to a charitable remainder annuity trust that pays to a special-needs trust.
PLR
200052035 Testamentary CRAT and Personal Foundation:
In the decedent's estate, a 5% charitable remainder annuity trust (CRAT) was created for the life of beneficiary A. After the demise of beneficiary A the trustees will distribute the principal from the annuity trust to qualified exempt charities.
PLR
200422005 Scrivener's Error Defense Saves CRAT:
Alice and Barney wanted to create a charitable remainder annuity trust (CRAT). They instructed an attorney to draft a CRAT for them. The attorney drafted a trust and Alice and Barney signed and funded it. The attorney later told Alice and Barney that due to a drafting or scrivener's error, the trust did not qualify as a CRAT.
PLR
200430012 CRAT May Terminate Upon Beneficiary's Remarriage:
Prior to marriage, Donor and Spouse entered into an ante-nuptial agreement. Pursuant to the agreement, Donor would provide certain financial benefits to Spouse in the event Donor died before Spouse. Such benefits included a yearly salary, monthly maintenance payments, free rent, health care coverage and a lump sum payment.
PLR
8637084 Current Income Annual Gift Exclusion:
The donor created a charitable remainder trust for a term of 13 years. Beneficiaries S and T will each receive one-half of the income for the lesser of the first four years or their respective lifetimes. Beneficiaries U, V and W will each receive one-third of the income for the lesser of the succeeding nine years or their respective lifetimes.
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