Thursday March 28, 2024

6.4.3 Super Grantor Lead Trust

Super Grantor Lead Trust

Calculating the Charitable Tax Deduction:  To illustrate how the deduction is calculated, consider John Donor who creates a living lead annuity trust on June 1, 2005.
A super grantor lead trust is created so that the donor is entitled to both an income tax and a gift tax deduction. The donor must include all trust income on his personal income tax return, but the trust is excluded for estate tax purposes. To achieve this result, the grantor may not retain control over the distribution of income or a reversionary interest. Sec. 2036(a). In other words, the grantor must retain a power that causes the trust to be a grantor trust but does not cause artificial estate inclusion. The preferred retained power is an administrative power, such as the power to vote or direct the voting of holdings, the power to control the investment of funds or the power to reacquire the trust principal by substituting other property of an equivalent value. Sec. 675(4).

A super grantor lead trust qualifies the grantor for a charitable income tax deduction. Sec. 170(f)(2). The charitable deduction is equal to the present value of payments from the trust to charity for the duration of the trust. For the grantor to receive the income tax deduction, the trust must qualify as a grantor trust. As a result, although the trust payments are made to a chosen charity, the trust income must be reported as taxable income on the grantor's personal income tax return. Sec. 170(f)(2)(B). In addition, if the trust recognizes any gain, the grantor must pay tax on the gain. Sec. 170(f)(2)(B).

Calculating the Charitable Tax Deduction


Super Grantor Lead Annuity Trust

While Crescendo incorporates information from IRS Pub. 1457 in its software, it is helpful for gift planners to know how the deduction calculation would be performed if they have to look up all factors. To illustrate this, consider John Donor who creates a living 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: 6/1/2017
  Beneficiary: Charity Term of Years:  10    
  Payment Frequency:   Annually              (Payments at End of Selected Period)
 
 Annuity Trust Initial Percentage: 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 1.0060 
3 Quarterly 1.0090 
4 Monthly 1.0110 
 (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    
       (Taxable Transfer)    
Note: If donor dies before end of trust term, part of deduction is recaptured.
Sec. 170(f)(2)(B).


The deduction worksheet illustrates the required information under Treasury rules for calculating a deduction. The top section lists the donor, gift amount, gift date, beneficiary, term of years, payment frequency and initial trust percentage.

Lines (A) through (G) are used to determine the charitable deduction, as explained in the paragraphs below.

(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 current month 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) An adjustment factor must be calculated for the payment frequency chosen. 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 (annually). Here, the time adjustment factor 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). Therefore, 8.7975 is multiplied by 1.0000 to produce 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. Here, John contributed $100,000 cash.

(G) Finally, the $61,583 present value of the annuity is subtracted from the $100,000 transferred to produce the charitable gift value. Here, $100,000 less $61,583 produces a remainder interest with a present value of $38,418. This means that John is making a gift of $35,418 to family in the year he creates the trust. This is a taxable transfer and will be applied toward John's lifetime gift exemption.

Super Grantor Lead Unitrust

Assuming the same information as above for John Donor, the calculation of John's charitable deduction for a lead unitrust is shown below. Note that the calculations for a unitrust are based on Pub. 1458, rather than Pub. 1457. 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).

           
Lead Unitrust for Term of 1-35 Years
  Donor: John Donor Gift Amount: $100,000 Gift Date: 6/1/2017
  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) 7.0% (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% 0.18 (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 - Taxable Transfer    
  (N) Gift Amount Less Line (M) $50,740 (N) 
         PRESENT VALUE OF INCOME INTEREST    
         (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 current month 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. Locate the proper period in this box. The right side of the table corresponds to the selected payment frequency for the first full year. Find the frequency selected (annually). The number that conforms to both the valuation and the frequency is the Table F 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 found 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 found 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 every 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 to family 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 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.

PLR 9224029 Super Grantor Lead Trust - Municipal Bonds:   Lead trusts are usually divided into two categories - grantor lead trusts with a current income tax deduction and return of the assets to the grantor and family, or non-grantor, lead trusts with the trust remainder distributed to family members. This lead trust creatively combines both concepts. Through use of the Sec. 675(4) power to substitute assets, it is a grantor trust, but it does not under Sec. 2036 require inclusion in the grantor's estate.


      Quiz-Basic



© Copyright 1999-2024 Crescendo Interactive, Inc.