Friday March 29, 2024

6.4.1 Living Grantor Lead Trust

Living Grantor Lead Trust

Calculating the Charitable Tax Deduction:  The donor's name, the fair market value of the contributed property, the gift date, the term of years, the AFR, the payment percentage and the payment frequency are all needed to perform the deduction calculation.
A living grantor lead trust is a charitable lead trust (CLT) in which the grantor retains a reversionary interest in excess of 5% of the corpus. Sec. 673(a). Although the grantor retains a reversionary interest, a living grantor lead trust qualifies the grantor for a charitable income tax deduction. Sec. 170(f)(2). Therefore, any income earned by the trust is taxable to the grantor. Sec. 170(f)(2)(B). In addition, if the trust recognizes any gain, the grantor must pay tax on the gain. To increase a grantor's charitable income tax deduction, it is best to use the lowest applicable federal rate (AFR). The charitable deduction for the distributions over the term of years is deemed "for the use of the charity" and can be deducted up to 30% of a grantor's adjusted gross income. Sec. 170(b)(1)(B).

Calculating the Charitable Tax Deduction


The donor's name, the fair market value of the contributed property, the gift date, the term of years, the AFR, the payment percentage and the payment frequency are all needed to perform the deduction calculation.

Annuity Trust

To illustrate how the deduction is calculated, consider John Donor who creates a living grantor lead annuity trust on June 1, 2017. John is 68 years old. The fair market value of the property used to fund the annuity is $100,000. The trust is for a term of 10 years, has a payout rate of 7.0% and will make annual payments. The AFR for the month of June is 2.4%. Using this information and IRS Pub. 1457, the charity's gift planner creates the following charitable deduction worksheet.

           
Lead Annuity Trust for Term of 1-35 Years
  Donor: John Donor Gift Amount: $100,000 Gift Date: 06/01/2017  
  Beneficiary: Charity Term of Years:  10    
  Payment Freq.:   Annually             (Payments at End of Selected Period) Initial Trust % 7.0  
 
 (A) Annuity Trust Payout: $7,000 (A) 
       AFR:   2.4%    
 (B) Factor: 8.7975 (B) 
       Term of Years:   10    
       IRS Pub. 1457, Table B    
 (C) Adjustment for Time of Payment: 1.0000 (C) 
      (IRS Pub. 1457, Table K)    
End of Period
1 Annual 1.0000 
2 Semi-Annual 1.0119 
3 Quarterly 1.0178 
4 Monthly 1.0218 
 (D) Adjusted Factor: 8.7975 (D) 
       Line(B) x Line(C)    
 (E) Present Value of Annuity: $61,583 (E) 
       Line(D) x Line(A)    
       (Charitable Deduction)    
 (F) Amount Transferred to Trust: $100,000 (F) 
 (G) Line(F) Less Line(E): $38,418 (G) 
       PRESENT VALUE OF REMAINDER INTEREST    
Note: If donor dies before end of trust term, part of deduction is recaptured.
Sec. 170(f)(2)(B).


The upper section lists John's name, gift amount, gift date and term of years.

Lines (A) through (G) are used to determine the charitable deduction.

(A) The annuity trust will make a payment to the selected charitable organization based on the frequency selected by the donor. The payout amount can be determined by multiplying the gift amount by the initial trust percentage ($100,000 x 7.0% = $7,000). The AFR for the month of the gift or for either of the two prior months may be used to determine the charitable deduction under Sec. 7520. With a lead trust, the lowest AFR is preferable to achieve a greater charitable deduction. Therefore, John's gift planner selects a 2.4% AFR.

(B) Pub. 1457, Table B lists the factors for the term of years lead trust. The appropriate chart in Pub. 1457, Table B is the one corresponding to the 2.4% AFR. The term of years (10) must be found on the left side of the appropriate chart. The result is the lead trust annuity factor of 8.7975.

(C) A time adjustment must be made for trusts paying other than annually. The time adjustment factor is found in Pub. 1457, Table K by locating the appropriate AFR (2.4%) at the left side of the table and using the corresponding payment frequency (annual). The time adjustment factor for John's trust is 1.0000.

(D) The adjusted factor is calculated by multiplying the 8.7975 factor in Line (B) by the 1.0000 time adjustment factor shown in Line (C). 8.7975 multiplied by 1.0000 is 8.7975.

(E) The present value of the annuity is determined by multiplying the adjusted factor shown in Line (D) by the annuity trust payout amount shown in Line (A). The result is the present value of the annuity, which also is the amount of the donor's charitable tax deduction. Here, the present value of the annuity trust and the amount of John's charitable deduction is 8.7975 multiplied by $7,000 to produce a result of $61,583.

(F) The amount transferred is the amount of cash or the fair market value of the property used to fund the annuity trust. Here, John contributed $100,000 cash.

(G) Finally, the $61,583 present value of the annuity trust is subtracted from the $100,000 transferred to produce the remainder value to John. Here, $100,000 less $61,583 produces a remainder interest with a present value of $38,418.

Unitrust

Assuming the same information as above for John Donor, the calculation of John's charitable deduction for a lead unitrust is shown below. 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).

The upper section lists John's name, gift amount, gift date, payment frequency and term of years.

           
Lead Unitrust for Term of 1-35 Years
  Donor: John Donor Gift Amount: $100,000 Gift Date: 06/01/2017  
  Beneficiary: Charity Term of Years:  10    
  Payment Frequency:   Annually              (Payments at End of Selected Period)
 
  (A) Unitrust Percentage: 7.0% (A) 
  (B) Factor: 0.976562 (B) 
         IRS Pub. 1458, Table F    
         AFR of the Month:   2.4%    
  (C) Factor for Adjusted Payout Rate 6.836 (C) 
  (D) Nearest Table Rate Below (C) 6.8% (D) 
  (E) Factor at Line (D) Rate 0.494492 (E) 
         IRS Pub. 1458, Table D    
  (F) Nearest Table Rate Above (C) 7% (F) 
  (G) Factor at Line (F) Rate 0.483982 (G) 
         IRS Pub. 1458, Table D    
  (H) Line (E) Minus Line (G) 0.010510 (H) 
  (I) Line (C) Minus Line (D) 0.036% (I) 
  (J) Line (I) Divided by 0.2% 0.180000 (J) 
  (K) Line (H) Times Line (J) 0.001892 (K) 
  (L) Line (E) Minus Line (K) 0.492600 (L) 
  (M) Line (L) Times Gift Amount $49,260 (M) 
         Present Value Remainder    
  (N) Gift Amount Less Line (M) $50,740 (N) 
         PRESENT VALUE OF INCOME INTEREST    
         (Charitable Deduction)    
Note: If donor dies before end of trust term, part of deduction is recaptured.
Sec. 170(f)(2)(B).


Lines (A) through (N) are used to determine the charitable deduction.

(A) The lead unitrust percentage is the percentage that the lead unitrust will pay out every pay period. Here, John selected 7.00%. The AFR for the month of the gift or for either of the two prior months may be used to determine the charitable deduction under Sec. 7520. With a lead trust, the lowest AFR is preferable to achieve a greater charitable deduction. Therefore, John's gift planner selects a 2.4% AFR.

(B) The factor for the adjusted payout rate is found in Pub. 1458, Table F. Locate the table corresponding to the 2.4% AFR selected. The left half of the table contains the number of months between the valuation and the first payout in the first calendar year. Locate the proper period in this box. The right side of the table corresponds to the selected payment frequency. Find the frequency selected (annual). The number that conforms to both the valuation and the frequency is the lead unitrust factor (0.976562).

(C) The adjusted payout rate is calculated by multiplying the unitrust percentage shown in Line (A) by the adjusted payout rate factor shown in Line (B). For John's unitrust, multiply 7.00% by 0.976562 to produce 6.836%.

(D) Pub. 1458, Table D lists the factors for the remainder interests in a unitrust postponed for a term of years. The IRS chart in Table D shows only 0.2% increments. Accordingly, Table D does not list an adjusted payout rate of 6.836%. Therefore, the nearest table rate below 6.836% must be found. Locate the appropriate chart in Table D using the adjusted payout rate of 6.836%. The nearest rate below 6.836% is 6.8%. This number is in the top row of the chart.

(E) Once the nearest rate below has been found (6.8%), locate the number of years in the unitrust term (10) along the left side of the chart. Here, the corresponding factor under a 6.8% payout for 10 years is 0.494492.

(F) Pub. 1458, Table D lists the factors for the remainder interests in a unitrust postponed for a term of years. Table D does not list an adjusted payout rate of 6.836%, so the nearest table rate above 6.836% must be found. Locate the appropriate chart in Table D using the adjusted payout rate of 6.836%. The nearest rate above 6.836% is 7.0%. This number is in the top row of the chart.

(G) Once the nearest rate above has been found (7.0%), locate the number of years in the unitrust term (10) along the left side of the chart. Here, the corresponding factor under a 7.0% payout for 10 years is 0.483982.

Next, the interpolation between 6.8% and 7.0% must be determined. Lines (H) through (K) compute the interpolation for the 6.836% rate.

(H) The factor for the 7.0% rate (0.483982) is subtracted from the factor for the 6.8% rate (0.494492) to produce 0.010510. In short, Line (G) is subtracted from Line (E).

(I) Next, the 6.8% nearest below rate shown in Line (D) is subtracted from the 6.836% adjusted payout rate shown in Line (C) to give the range between the two rates of 0.036%.

(J) Because Table D shows only 0.2% increments, Line (I), or 0.036%, is divided by 0.2% to produce the factor differential percentage of 0.18.

(K) To find the interpolation result, Line (H) (0.010510) is multiplied by Line (J) (0.18). The result is 0.001892.

(L) Subtracting the interpolation result of 0.001892 shown in Line (K) from the nearest rate below shown in Line (E) produces an IRS deduction factor of 0.492600.

(M) The present value of the remainder interest can then be calculated by multiplying the IRS deduction factor of 0.492600 by the $100,000 gift amount. The resulting present value, or today's value of the amount that will revert to the grantor based on the projected duration of the trust, is $49,260.

(N) Finally, the present value of the income interest, which is the same as the charitable deduction, can be calculated by subtracting the $49,260 present value of the remainder interest from the $100,000 gift amount. Thus, the present value of the income interest is $50,740. John will receive a charitable deduction for $50,740 in the year he creates the trust.

Private Letter Rulings

PLR 199908002 Lead Unitrust and Lead Annuity Trust - Sub S Grantor Trusts:   Grantor plans to fund a charitable lead unitrust and a charitable lead annuity trust with Subchapter S stock. Both trusts would pay out for six years with a payout rate calculated to produce a charitable deduction of 59.9%. With a charitable deduction below the 60% level, the lead trusts would not be subject to the Sec. 4943 excess business holdings rules. Trust distributions would be to a family foundation, and grantor may serve as a director of that foundation, but any lead trust funds transferred would be maintained in a segregated account under the control of other directors.

PLR 200011012 Annuity Lead Defective Grantor Trust:   The taxpayers in this trust plan to fund an annuity lead trust, which is intended to qualify for income, gift and estate tax deductions and also last for 30 years. In contrast to remainder trusts, which are limited to no more than 20 years under Sec. 664 and may not pay less than 5%, lead trusts may be of any duration and may pay out any percentage amount.


      Quiz-Basic



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